London - Ukraine's debt insurance costs hit four-year highs on Tuesday and bonds fell on fears of a looming debt and currency crisis while other emerging markets mostly failed to gain from signs of improving world growth.
Broadly positive data in China, Turkey and South Africa reinforced the picture of a pickup in economic momentum across much of the developed world but this is being offset by uncertainty over when the US Federal Reserve will start winding down, or tapering, its stimulus.
That has stalled emerging equity gains, with the main index flat near the previous session's one-week highs. Markets will seek clues from the Fed's Dec. 17-18 meeting on how soon the US central bank will start tapering.
Chinese stocks were flat as data showed growth in China's factory output and investment eased slightly in November though retail sales grew at their strongest rate this year. Indian stocks too pulled back from the record highs hit on Monday.
“The majority still think (the Fed) are going to continue their QE programme, which is quite a good environment for emerging markets,” said Thu Lan Nguyen, a strategist at Commerzbank in London.
But the main focus was on Ukraine where protesters kept up pressure on President Viktor Yanukovich as he prepared to meet three former presidents and hold talks with EU foreign affairs chief Catherine Ashton.
The hryvnia fell 0.7 percent after touching six-week highs in the previous session as traders in Kiev said some overnight liquidity provided by the central bank had helped ease the hryvnia's shortage and pushed down elevated money market rates .
But bond prices plunged, with the 2014 issue of state energy firm Naftogaz down 1.5 points to trade at less than 90 cents in the dollar for the first time in two years while the 2017 sovereign bond also fell more than 1 point.
Five-year Ukraine credit default swaps surged to four-year highs beyond 1,150 basis points, Markit said, while one-year CDS closed Monday at 1,466 bps, an indication that default is considered more likely in the short term than over five years.
“The situation is bad and the market knows it. We do not expect a 2014 default in our base case, and neither does the market. Survival probabilities drop sharply thereafter though,” Bank of America/Merrill Lynch said in a note.
Nguyen of Commerzbank forecast the currency could be devalued within months to around 9 per dollar if the government manages to get some international backing to engineer a controlled depreciation.
In Turkey, the lira rose 0.3 percent after data showed the economy grew 4.4 percent year-on-year in the third quarter, beating forecasts, though the growth rate slowed from the second quarter of the year.
The South African rand also firmed to 10-day highs after data confirmed a rebound in mining output in October. - Reuters