April 11, 2018 / 1:25 PM / 11 days ago

EMERGING MARKETS-Spike in U.S.-Russia tensions hammers rouble, EM stocks

(Recasts, updates prices, adds fresh comments)

By Claire Milhench

LONDON, April 11 (Reuters) - A spike in tension between Russia and the United States sent the rouble to its weakest since November 2016 on Wednesday, while Turkey’s lira plumbed another record low and emerging stocks slipped as risk appetite soured.

MSCI’s benchmark emerging stocks index fell 0.2 percent with emerging Europe a sea of red, offsetting a stronger performance earlier in Asia.

The mood turned more bearish across emerging markets after U.S. President Donald Trump warned Russia of imminent military action in Syria over a suspected poison gas attack, lambasting Moscow for standing by Syrian President Bashar Assad.

“Trump has upped the stakes and the tensions, and caused fears to mount,” said William Jackson, senior emerging markets economist at Capital Economics. This caused another leg down in both the rouble and the lira, and turned into a broader sell off across emerging market assets, he said.

The rouble extended losses, tumbling 2.5 percent, having fallen almost 12 percent since Friday when the U.S. levied sanctions against Russian businessmen and their companies to punish Moscow for its alleged meddling in the 2016 U.S. election.

“(The rouble) is being driven by headline risk - investors don’t know what’s next,” said Kiran Kowshik, a strategist at UniCredit.

He added that investors were overweight Russian assets, with holdings of OFZ Treasury bonds by non-residents at well over 30 percent. “That’s the highest in years, and I think a lot of that’s unhedged. So it makes sense you will see further weakness in the rouble in the near term.”

Russian credit default swaps rose to 162 basis points (bps) according to IHS Markit data, up 11 bps from Tuesday’s close to the highest since early August 2017.

The average yield spread of Russian sovereign bonds over safe haven U.S. Treasuries on the JPMorgan EMBI Global Diversified index also rose 7 bps to 242 bps.

The Turkish lira fell 1.7 percent to another record low, while five-year credit default swaps jumped to a fresh 4-1/2 month high of 219 bps, up 10 bps from Tuesday’s close according to IHS Markit. Turkish stocks also tumbled 2.6 percent to four-month lows.

Kowshik said UniCredit had been consistently bearish on the lira, as inflation was failing to moderate as much as anticipated and it was not clear if the central bank would respond. The tensions between Russia and the U.S. over Syria - which shares a border with Turkey - have added to the woes.

Analysts at ING said the current account deficit, which came in at $4.152 billion in February, made the currency vulnerable to sudden shifts in investor sentiment.

The Kazakh tenge lost another 1 percent to hit a three-month low, following the rouble down.

The Polish zloty dipped from five-week highs versus the euro, with the central bank holding rates at 1.5 percent as expected. Jackson said the bank was likely to remain dovish as inflation had been weak.

The weak performance in Europe was in contrast to the more bouyant Asian session. Chinese mainland shares and Hong Kong stocks climbed around 0.5 percent after Beijing pledged to allow foreign firms to compete on an equal footing with domestic companies in the financial sector.

The gains came despite data showing that factory gate prices cooled to a 17-month low in March, while consumer prices eased from February’s multi-year high as the booming demand spurred by the Lunar New Year holiday receded.

For GRAPHIC on emerging market FX performance 2018, see tmsnrt.rs/2e7eoml For GRAPHIC on MSCI emerging index performance 2018, see tmsnrt.rs/2dZbdP5

For TOP NEWS across emerging markets

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see) Emerging Markets Prices from Reuters Equities Latest Net Chg % Chg % Chg

on year

Morgan Stanley Emrg Mkt Indx 1172.84 -2.48 -0.21 +1.24

Czech Rep 1124.05 -0.97 -0.09 +4.26

Poland 2260.64 -14.17 -0.62 -8.15

Hungary 37914.36 +31.94 +0.08 -3.72

Romania 8817.74 -24.00 -0.27 +13.72

Greece 797.75 -12.79 -1.58 -0.58

Russia 1063.54 -27.25 -2.50 -7.87

South Africa 49552.43 -483.64 -0.97 -5.67

Turkey 07969.33 -2743.36 -2.48 -6.38

China 3208.32 +17.99 +0.56 -2.99

India 33940.44 +60.19 +0.18 -0.34

Currencies Latest Prev Local Local

close currency currency

% change % change

in 2018

Czech Rep 25.31 25.30 -0.03 +0.87

Poland 4.19 4.19 -0.12 -0.38

Hungary 311.47 311.14 -0.11 -0.30

Romania 4.66 4.65 -0.17 +0.32

Serbia 118.11 118.11 +0.00 +0.25

Russia 64.50 63.01 -2.30 -10.60

Kazakhstan 331.06 327.45 -1.09 +0.53

Ukraine 25.92 25.94 +0.10 +8.61

South Africa 12.06 12.03 -0.24 +2.47

Kenya 100.85 101.00 +0.15 +2.23

Israel 3.51 3.50 -0.44 -1.05

Turkey 4.16 4.11 -1.06 -8.81

China 6.28 6.28 -0.03 +3.58

India 65.26 64.94 -0.48 -2.18

Brazil 3.42 3.41 -0.27 -3.10

Mexico 18.27 18.26 -0.02 +7.57

Debt Index Strip Spd Chg %Rtn Index

Sov’gn Debt EMBIG 324 4 .07 7 93.27 1

Reporting by Claire Milhench Editing by Alison Williams

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