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.