EMERGING MARKETS-Stocks drop 1 pct, inflation in focus

Tue May 3, 2011 4:14pm IST

* Emerging stocks drop 1 pct, debt spreads flat

* Indian stocks fall after major rate hike

* Ivory Coast bond at 5-mth high after finmin letter

By Carolyn Cohn

LONDON, May 3 (Reuters) - Emerging stocks dropped 1 percent on Tuesday as falling commodity pricesand inflation concerns outweighed buoyancy on the death of Osama bin Laden, with a large Indian rate hike depressing Indian equities. The dollar trimmed initial gains but commodity-producing markets came under pressure from a fall in energy and raw materials prices, as bin Laden's death was initially seen lessening Middle East security risks.

"We saw a move up yesterday when there was a knee-jerk reaction to the death of bin Laden, then realisation set in that it didn't really have a meaningful effect on the economic backdrop, so the U.S. market came off and emerging stocks are following that," said John Lomax, head of emerging equity strategy at HSBC.

The prospect of continued low U.S. interest rates has been providing support for higher-yielding emerging markets, but inflation is a concern in many of these economies.

Indian stocks .BSESN dropped nearly 2 percent, bringing losses for the year to 9 percent, after the country's central bank raised rates by a larger than expected 50 basis points to tame inflation.

Russian stocks .IRTS hit their lowest in nearly two weeks after the central bank raised key interest rates by 25 basis points on Friday, though the rouble RUB= strengthened.

"India and Russia are the two markets where inflation is underestimated but for many markets it's been adequately discounted in the prices," said Lomax. The MSCI emerging equities index .MSCIEF fell 1 percent to a 13-day low, off recent June 2008 highs, and the Thomson Reuters emerging Europe index .TRXFLDEEPU fell 0.75 percent, retreating from recent multi-year highs.

Emerging sovereign debt spreads 11EMJ edged in by 1 basis point to 273 bps over U.S. Treasuries.

Emerging market currencies were generally weaker, though the Polish zloty EURPLN= briefly hit its highest in over two months against the euro, with local markets shut for a holiday.

Ivory Coast's defaulted $2.3 billion bond edged up to fresh five-month highs after finance minister Charles Koffi Diby said last week the country wanted more time to pay an outstanding $29 million coupon.

The finance minister's letter, issued via the Emerging Markets Traders' Association, was the first statement on the bond from the government of new president Alassane Ouattara.

"The mere fact that there was communication from the new government is being viewed as a positive," a bond trader in London said.

The bond XS0496488395=R rose 1.01 points in price to 56.4 cents on the dollar, while the yield dropped 0.2 percent to 11.38 percent, Thomson Reuters data showed. (Additional reporting by Sujata Rao; Editing by John Stonestreet)

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