Stocks tumble 2.5pc

LONDON: Emerging equities plumbed fresh 11-month lows on Monday and high-yield currencies fell to multi-month lows, reacting to the US ratings downgrade before ECB purchases of Italian and Spanish bonds provided slight relief to market sentiment.

Asian markets, heavily reliant on exports to the United States, bore the brunt, with Chinese stocks down 3.8 percent for the biggest one-day loss since November 2010. Seoul, down 6 percent at one point, ended 4 percent lower while India and Taiwan also lost over 3 percent.

These four markets make up around half the MSCI index.

MSCI's benchmark emerging equity index fell at one stage to a Sept 2010 low but briefly edged off lows in European trade as bond-buying by the European Central Bank shored up sentiment.

By 1115 GMT, the index was down 2.6 percent, its fifth straight session in the red, bringing year-to-date losses to almost 12 percent.

Emerging sovereign bond yields rose, with spreads over US Treasuries widening 7 basis points to 304 bps, the widest in six weeks

The European and US debt fears pushed emerging stocks down 8.5 percent last week and they are now hit by rating agency S&P's late Friday move to cut US triple-A ratings by a notch.

"The global environment is extremely negative, and quite complicated also for emerging markets. Global growth expectations are still coming down," said Maarten-Jan Bakkum, emerging markets strategist at ING Investment Management.

"There is a bit of good news from (the euro zone) it could help sentiment a bit but for emerging markets there is still much more downside."

With fears of a new global recession preying on investors' minds, $2.5 trillion were wiped from the value of world stocks last week while oil and metals prices have fallen.

The commodity rout took a toll on Russia, with Moscow stocks down over 2 percent to the lowest since Dec. 2010 and the rouble at nearly a six-month low against the dollar.

Similarly, South African equities fell just over 1 percent after slumping 6.6 percent last week.

Analysts say emerging markets' own better finances will not insulate them from the deepening global malaise. Israeli stocks for instance, classified as emerging markets until last year, reacted to the US downgrade with a 7 percent collapse on Sunday though they bounced 2 percent on Monday.

SEB analysts downgraded Korea, Malaysia, Philippines and Russia to neutral in their model portfolio.

"All of them have had strong equity fund flows year-to-date. If this market continues down they look vulnerable," they said in a note.

Turkish stocks continued last week's big declines, falling 4.7 percent after losses of 5 percent on Friday

The falls come after the central bank stunned markets with an interest rate cut last week. Bank Governor Erdem Basci on Monday signalled more rate cuts could be on the way.

"Turkey will struggle as it's a high beta but at the same time we know that Turkey has been creating additional problems for itself, with a policy mix that investors don't like or don't understand," ING's Bakkum said. "It seems to be experimenting at a time when you should not be experimenting."

Turkish 2-year yields reacted by falling more than 10 basis points but the lira extended losses, falling to a new 28-month low to the dollar

Emerging currencies fell against the euro and the dollar, with the greenback bolstered by a fresh Treasury rally though it stayed near record lows versus the safe-haven Swiss franc.

Big emerging currency falls were seen in Asia, forcing several central banks to step in. Korea's won for instance suffered its worst day in nine months.

In Europe, the Hungarian forint was the top loser, falling 0.9 percent to a new six-month low versus the euro and touching a fresh record low against the Swiss franc.

There is growing fear that Hungarian households and municipalities with Swiss-franc debt will be hard hit by the franc's surge, weighing on bank profits and economic growth. The exchange rate is now around 238 forints to the franc, well off the rate of 180 at which loan repayments are temporarily capped.

"The longer (franc strength) lasts, the more destabilising it is for the Hungarian economy," said Gaelle Blanchard, emerging currency strategist at Societe Generale.

The zloty fell 0.7 percent against the euro to a 4-1/2 month low while the Czech crown eased by a lesser 0.2 percent.

Blanchard said it was highly unlikely other regional central banks would follow Turkey's example and cut rates, even those such as Romania which she said could have done do. Rate hikes on the other hand are likely to be pushed back further, she noted, naming Czech and Polish rates as a possibility.

Copyright Reuters, 2010