LONDON, June 20 (Reuters) - Stocks and bond prices plunged and debt insurance costs soared in a general flight from emerging markets on Thursday, after the U.S. Federal Reserve laid out a timetable for turning off the taps on its $85 billion-a-month bond-buying programme.
The MSCI emerging stock index was down by over 3.3 percent, hitting its lowest level since July 2012 and heading for its biggest one-day fall since Oct 2011, with weekly losses of more than 6 percent, as U.S. 10-year Treasury yields surged to 15-month highs.
MSCI's emerging Europe index fell 4.7 percent, while the Russian index was down over 3 percent and the Turkish index down over 4 percent, following a 3 percent drop overnight in Brazilian stocks.
Fed chairman Ben Bernanke said late on Wednesday the U.S. economy was expanding strongly enough for the central bank to begin slowing the pace of its asset-buying campoaign later this year.
Investors have rushed into emerging market assets in the past couple of years, as the Fed's stimulus programme kept U.S. interest rates at rock-bottom levels. Those positions are now being unwound.
"We are seeing big moves on emerging markets but we will see more," said Maarten-Jan Bakkum, investment strategist for ING Investment Management's emerging market funds.
"Even a marginal change in Fed (liquidity) injections will have an impact on emerging markets as it will add to the fundamental problems we are seeing in the sector. You also should not underestimate what's happening in China."
Sentiment was battered further by data showing China's factory activity weakened to a nine-month low in June, pushing Shanghai shares down almost 3 percent.
There also appears little relief on the horizon in terms of monetary policy easing in China, the world's No. 2 economy.
Shanghai equities tumbled almost 3 percent while two of China's shortest-term money market rates hit record highs, as the central bank again ignored market pressure to inject funds into the market..
Meanwhile in the euro zone, central Europe's biggest trade partner, flash manufacturing PMI data in June stayed well below the 50 level that indicates expansion.
The emerging domestic debt trade which has been most in vogue in the past year was suffering a big sell-off, hit by big currency losses. Average yields on the JP Morgan local currency debt index are up about 1 percentage point since the start of the year.
South African 10-year yields spiked almost a half percentage point, the biggest one day rise in 10 years as the rand fell more than 1 percent.
"The EM currency bleeding will be worse in markets with large bond exposure. So, watch Turkey, Poland, Hungary and of course South Africa. Carry trades, if any are left out there, will be imploded," said Luis Costa, head of CEEMEA debt and debt strategy at Citi.
He was referring to the practice of borrowing in low-interest rate currencies such as the dollar and buying higher- yielding assets in other currencies.
The Russian rouble fell more than 1 percent to the dollar , prompting some verbal intervention from central bank officials. Earlier in Asia central banks in India and South Korea intervened to stem currency losses.
The Turkish lira hit an all-time low and the Polish zloty hit a one-year low against the euro.
Turkish assets have been highly volatile this month following mass protests against Prime Minister Tayyip Erdogan's government. But Turkey's deputy prime minister Bulent Aric said on Wednesday he had no objection to silent anti-government protests, comments that could help draw the sting out of three weeks of often violent demonstrations.
In tandem with the asset sell-off, the cost of insuring exposure to emerging markets surged. Russian and Turkish five-year credit default swaps climbed 26 basis points, according to Markit. South African CDS hit the highest since Nov 2011.
Emerging sovereign debt spreads tightened slightly against rising U.S. Treasury yields, to 335 basis points but year-to-date the sector has posted losses of over 6 percent.