London - Emerging equities fell more than 1 percent on Friday and currencies weakened after strong US data raised the spectre of faster US Federal Reserve rate rises, while South African markets were jittery before a sovereign debt ratings review.
Tracking dips on developed bourses, the benchmark emerging stocks index extended the previous day's retreat to hit a 10-day low as investors shunned riskier assets, though earlier gains meant the index was poised to end the week just 0.7 percent lower.
The sovereign spread over U.S. Treasuries on the JPMorgan EMBI Global Diversified added 2 basis points (bps) to 364 bps and was flirting with recent multi-month highs. The spread has widened by 34 bps since the US election.
An acceleration in US factory activity in November has fuelled expectations that the Fed could raise interest rates faster than previously expected, pushing 10-year Treasury yields to 18-month highs on Thursday. Markets now await US non-farm payrolls due out later in the day.
"The risk is that a strong print in the payrolls may firm the hand of the Fed," said Cristian Maggio, head of emerging markets strategy at TD Securities.
"Pretty much everybody is expecting a hike of 25 bps in December, but it's about what comes next - the strength of the U.S. economy is one of those factors that will determine how aggressively the Fed tightens monetary policy next year."
Asian markets set the weaker tone with Chinese mainland shares down 1 percent and Hong Kong stocks down 1.4 percent, but the selling extended into the European trading session.
South African stocks were among the biggest fallers, down almost 1.4 percent, while the rand weakened as much as 0.15 percent against the dollar ahead of a sovereign debt ratings review by Standard & Poor's.
Africa's most industrialised country has been trying to avert a sovereign rating downgrade to junk status that would raise borrowing costs and deter investment.
"They have had a negative outlook on for a year so given that the political and economic situation has deteriorated there's a very good chance they will resolve that outlook into a downgrade," Maggio said, adding the rand had outperformed many of its peers since June and was now overvalued in his view.
"The market has become overly optimistic on South Africa - it has priced in for too long without any solid reason that [President Jacob] Zuma may end his term prematurely."
The yield premium paid by South African sovereign bonds over US Treasuries widened out by 2 bps to 299 basis points, the widest level since mid-November.
The Russian rouble weakened 0.4 percent against the dollar after oil prices gave up some of the week's gains, slipping almost 1 percent.
Brazil's real extended losses overnight, down around 3 percent against the dollar to trade around six-month lows. Traders fear that friction between lawmakers and prosecutors could increase political instability and delay the approval of austerity measures, while the economy continues to shrink.
The Korean won also weakened 0.4 percent, pressured by plans for a Dec. 9 impeachment vote on President Park Geun-hye, who has already offered to resign over allegations of collusion with a friend.
In emerging Europe, the Polish zloty weakened 0.1 percent against the euro to trade at five-month lows ahead of another S&P ratings review, where some traders fear a downgrade.
Its 'BBB+' rating is on negative outlook, and a rise in government spending may put further pressure on Poland's ratings, analysts have said.
"We expect [the zloty] to remain under pressure in coming months, with euro/zloty breaking 4.50 in H1 2017," Rafal Benecki, ING's chief economist for Poland, said in a note.