LONDON (Reuters) - Bears returned in force to emerging markets on Monday as renewed fears of a U.S. recession took equities down a further three percent and pushed debt yield spreads out four basis points over U.S. Treasuries.
By Sujata Rao
LONDON (Reuters) - Bears returned in force to emerging markets on Monday as renewed fears of a U.S. recession took equities down a further three percent and pushed debt yield spreads out four basis points over U.S. Treasuries.
As expectations faded for more policy easing this week from the U.S. Federal Reserve after last week's impromptu 75 basis points cut, world financial markets on Friday gave up much of their mid-week bounce, pushing emerging equities down 2 percent.
They extended falls on Monday <.MSCIEF>, dropping 2.8 cent by 1130 GMT, taking their cue from hefty Asian and European losses. The index has fallen 13.3 percent so far this year compared with about 10.7 percent for the corresponding world index.
!ADVERTISEMENT!Emerging bond yields widened 4 bps to 280 bps over U.S. Treasuries, which were again getting safe-haven bids after investors digested a $150 billion fiscal plan for the U.S. economy. Treasury 10-year yields are just off 4-1/2 year lows.
Emerging yield spreads widened beyond 300 bps last week for the first time in 2-1/2 years but closed the week at 276 bps.
"Emerging markets are still looking shaky ... we are seeing a very defensive approach from most market makers," said Luis Costa, head of emerging debt strategy at Commerzbank in London.
"News over the weekend with IMF officials in Davos calling for a more accommodative fiscal stance did not help the scenario," he said, referring to International Monetary Fund head Dominique Strauss-Kahn who said fiscal policy must complement central banks' looser monetary policies.
The comments underscore the seriousness of global economic problems, analysts say.
Costa said despite bounces such as the one seen last week, buyers had become much more cautious of poorer-quality assets.
"Leveraged hedge funds who used to be buyers of B-rated bonds have become more conservative, moving allocations from corporates to sovereigns, while market makers are not as willing to support bonds as before," he added.
The week could turn out to be a crucial one in terms of direction, with the Fed meeting as well as key jobs and housing data in the United States.
SOUTH AFRICA
Turkish and South African stocks were the worst losers, falling over 3 percent <.XU100> <.JTOPI>. Local politics are weighing on Turkish markets as the ruling AK Party seeks to remove a ban on the Muslim headscarf at universities, a move certain to anger the secular elite.
South African assets continued to take a hit from the power shortages that have closed mines, sent world gold and platinum prices to record highs and are threatening an economic slowdown.
Mining shares, which dominate the local market, fell while the rand lost one percent versus the dollar, though it stayed off the seven-month low hit last week.
Trade and inflation numbers are due before the central bank meets on Thursday.
"The power shortage issue is pretty major ... it could knock growth going forward," said Debbie Orgill, economist at ABN AMRO.
Most analysts, including Orgill, expect the central bank to keep interest rates steady this week at 11 percent.
The rand has lost 4.5 percent this year while a Reuters poll forecast CPIX inflation to have picked up to 8.5 percent in December, well above the central bank target range.
"They will look at recent weaker activity numbers and given the widening in interest rate differentials, they may think they have done enough, but they will be mindful of the weaker currency and pass-through to inflation," she said. "It's going to be a close call."
Israel's shekel fell a half percent versus the dollar before a central bank meeting that is seen holding rates steady at 4.25 percent.
(Editing by Ruth Pitchford)
