LONDON: Turkey's lira hit a new low on Thursday, hurt by fresh violence in the east of the country as well as a weak emerging market outlook underscored by lacklustre Chinese data and Brazil's ratings cut to junk.
Emerging stocks fell almost 1 percent, snapping a two-day run of gains after data showed Chinese producer inflation declining for the 42nd month in a row, signalling deflation risks in the world's No. 2 economy. Chinese mainland shares lost more than 1 percent.
A contraction in Japan's key gauge of capital spending also deepened fears of a global contraction, hitting Asian equity, currency and commodity markets.
Emerging economies, already grappling with an investor exodus and slowing growth, now face growing risks of credit rating downgrades, especially after S&P's decision on Wednesday to relegate Brazil to junk for the first time in seven years.
"While it seems clear that other ratings agencies will follow suit on Brazil, it also seems clear that the S&P move will accelerate speculation of downgrades in other countries," said Simon Quijano-Evans, chief EM strategist at Commerzbank.
A London-listed exchange-traded fund dedicated to Brazilian stocks hit a new record low while a Tokyo-listed ETF fell 4 percent.
Brazil will lose its investment grade rating with two agencies by the end of 2016, JPMorgan predicted, warning that would lead to forced selling of hard currency government debt worth $6.2 billion and another $14 billion outflow from corporate bonds.
Quijano-Evans highlighted South Africa and Turkey as junk status candidates, adding that AA-rated China too could start to appear on the ratings radar because of its high debt levels.
Turkey, which holds elections again on Nov. 1, is dealing with escalating violence in its eastern regions, with daily clashes between militants from the outlawed PPK Kurdish party and security forces since July.
The lira hit a low of 3.06 per dollar, shrugging off data showing stronger-than-expected 3.8 percent growth in the second quarter. Turkish stocks fell to two-week lows.
Finance minister Mehmet Simsek admitted political unrest was damaging public finances and pressuring budget and current account deficits.
Fitch will review its BBB-minus rating on Turkey rating on Friday and may cut the outlook to negative. "Whatever decision Fitch takes on Turkey, the country's ratings will remain under pressure in the foreseeable future due to numerous domestic and external challenges.
This is also the case for South Africa and other major (emerging markets)," TD Securities wrote.
Ratings downgrade fears are likely to deter any investors who see value in battered emerging stocks and bonds, they added.
In eastern Europe, the rouble rose 0.6 percent as oil steadied and a central bank meeting on Friday is seen keeping interest rates unchanged.
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