LONDON: The Russian rouble hit a one-month low and bond spreads traded at their widest year-to-date on Friday after the West condemned a nerve agent attack on British soil and the US imposed fresh sanctions.
Britain, the United States, Germany and France have jointly called on Russia to explain a nerve toxin attack in England on a former Russian double agent and his daughter. Moscow has denied any involvement in the poisoning.
The US Treasury has also slapped more sanctions on Russian citizens and entities for election meddling and cyber attacks in the most significant steps the United States has taken against Russia since President Donald Trump took office.
Russia holds presidential elections on Sunday, in which President Vladimir Putin faces no credible threat.
The rouble fell as much as 0.3 percent against the dollar to its lowest since mid-February, and is set to end the week down around 1.5 percent.
The average yield spread of Russian sovereign bonds over US Treasuries on the JPMorgan EMBI Global Diversified index widened out another basis point to 175 basis points (bps), the widest so far this year, and up 13 bps since the start of the week.
Russian five-year credit default swaps rose to 108 bps, their highest since Feb. 23, according to IHS Markit data, and up 5 basis points this week.
"The fear in the market is that the sanctions versus Russia will be tightened more significantly, also from the EU side," said Jakob Christensen, head of emerging markets research at Danske Bank, adding that the new US sanctions were "fairly benign" in their impact.
Books for a new 11-year Russian sovereign Eurobond are expected to close today in a test of appetite for Russian debt.
Moscow shares fell 0.4 percent to a near one-month low and were set to end the week down around 2 percent.
VULNERABLE LIRA
Turkey's lira also remained under pressure, hitting a new record low against the euro. It is now down almost 3 percent for the week.
Christensen said the lira was one of the more vulnerable emerging market currencies to further tightening from the US Federal Reserve, and there were lingering concerns about the Syrian situation.
Against the dollar, the lira was down 0.5 percent at a 3-1/2 month low, and down around 2.7 percent for the week in its worst performance since October 2017.
Turkish five-year CDS also rose to a one-month high of 176 bps, according to IHS Markit data, up 10 basis points this week.
South Africa's rand also struggled, down 0.4 percent and set to end the week down almost 1 percent.
South African chief prosecutor Shaun Abrahams will today announce whether he is reinstating corruption charges against former president Jacob Zuma, who was forced to resign by the ruling African National Congress (ANC) last month.
Emerging market stocks also sold off as worries about a global trade war continued to crimp risk appetite. MSCI's benchmark emerging stocks index fell 0.2 percent but was still set to end the week in the black.
Some of the biggest losses came in Asia, where the big manufacturing exporters were seen as vulnerable to increased protectionism. Indian shares tumbled 1.5 percent and Chinese mainland shares fell almost 1 percent, set to end the week down 1.3 percent.
A report earlier in the week that Trump was seeking to impose tariffs on up to $60 billion of Chinese imports has weighed on the market.
"We see quite a likelihood of further US measures on intellectual property with China," said Christensen. "The question here is what will China's response be and whether that risk prompts further trade measures on the US side."
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