LONDON: Fears that Portugal could be forced to seek emergency aid hit risk appetite on Monday, pushing emerging stocks down almost one percent, while the Turkish lira plumbed new six-month lows against the dollar.
While investors remain broadly bullish on emerging markets, euro zone debt worries and data showing a sharp fall in China's trade surplus dampened equity markets, and higher inflation across the developing world is also making investors wary.
By 1130 GMT, emerging stocks were down 0.98 percent on the MSCI index, having already lost 1.3 percent in 2011. The index was weighed down by weakness in Asia, as Chinese stocks fell 1.6 percent. Inflation and rate rise fears pushed India down 2.5 percent while Indonesia closed 4 percent lower.
UBS strategist Manik Narain said investors are focusing on a Portuguese debt auction on Wednesday which may show if the country can meet its 2011 funding needs or will have to beg aid from the European Union and International Monetary Fund.
"We saw the Chinese trade balance significantly lower than expected and also that the government is extending the property tax in southern China. There are concerns that may be a sign that more (policy) tightening is forthcoming," Narain added.
China has taken a slew of measures to cool its property markets since late 2009 as part of efforts to fight speculative "hot money" flowing into the country.
In emerging Europe, stocks fell more than 1 percent with markets in Prague - the economy most geared to euro zone powerhouse Germany - down almost 2 percent.
INFLATION FEARS
Turkish stocks fell 1.3 percent, bogged down by the euro zone worries but also hit by investors' concern over central bank dovishness that could fuel a rebound in inflation after the first quarter of 2011. The bank cut rates by 50 basis points last month.
The lira has fallen almost 3 percent so far this year, losing 0.7 percent on Monday to a new six-month low.
UBS' Narain noted the central bank's rate cuts were especially risky at a time when inflation is on the rise across emerging markets and oil prices have risen 20 percent in lira terms over the past three months.
"We have been defensive on the lira since last October as we think it is one of the most vulnerable emerging currencies. Depending on data, we see a strong risk it continues to weaken and we recommend buying downside Turkey protection," he added.
Turkish benchmark bond yields slipped to a fresh record low around 6.94 percent. But central bank rate-cutting has fuelled a significant steepening of the curve as bondholders price in big rate rises further down the line - 10-year yields are up half a percent since the start of the year.
"Persistent lira weakness is likely to translate into further steepening so long as the near-term prospects for interest rates favour a further rate cut," Tradition Analytics said in a note. "Whilst more rate cuts are therefore anticipated, more steepness will unfold."
Other emerging currencies were also broadly weaker, with the zloty and Czech crown falling 0.5 percent to 0.3 percent against the euro.
The forint was hit harder due to Hungary's high debt levels and unorthodox fiscal policies. It fell 0.8 percent to a one-month low while bond yields also inched higher.
Hungarian five-year credit default swaps (CDS) rose to fresh seven-month highs of 411 bps. The country is now among the ten riskiest sovereign debtors.
ING predicts rate rises in January and February before the government appoints four new members to the central bank board in March and this should be slightly currency-positive.
"Yet the heightened risk environment, and Hungary's sharply widening CDS spreads, warn that there are safer investments than the forint," ING analysts said in a note.
Comments
Comments are closed.