Growth fears return, S.African debt gains

LONDON: Global growth fears reasserted themselves on Thursday, knocking emerging markets lower as investors braced for a string of economic data due out of the United States later in the day.

Poland's main share index tumbled as much as 4 percent, led by bank stocks, while South African bonds remained well-bid by foreign investors positioning for the central bank to keep interest rates lower for longer.

The more supportive tone seen in the markets earlier this week gave way as investors turned more risk averse in light of faltering global demand.

Morgan Stanley slashed its global growth forecasts for 2011 and 2012, warning that the United States and the euro zone were "dangerously close to a recession".

"We had a big selloff and then a bit of stabilisation and now it's back to a situation where people realise fundamentally not a lot has changed," said Zsolt Papp, who helps manages 1.2 billion euros in emerging debt for Union Bancaire Privee.

The scheduled release later in the day of US existing home sales and weekly jobless claims data also gave investors cause for caution.

There was also still lingering disappointment that Tuesday's meeting between German leader Angela Merkel and French President Nicolas Sarkozy failed to produce more radical solutions to stem the euro zone debt crisis, Papp said.

"Add to that disappointing growth numbers everywhere and you have a scenario where you have not necessarily recession but stagnation. The result is a market which is not going anywhere," he added.

Emerging shares fell 1.7 percent by 1000 GMT, reversing three straight days of gains while emerging sovereign debt widened 2 basis points to trade 333 bps over US Treasuries.

Chinese shares dropped 1.6 percent to one-week lows while Indian stocks ended the Asian session more than 2 percent lower.

The emerging European index slipped 1.7 percent with sharp losses seen across the region.

Polish shares were down 3.7 percent to their lowest in a week, rattled by sharp equity losses in Germany, Poland's biggest trading partner.

"We're following Germany, which could be falling more than others because they did not ban short selling," said one Polish broker. "The banks are taking the biggest hit." France, Italy, Spain and Belgium all imposed a ban on short selling of financial stocks last week after wild swings in European banking shares.

Turkish and Romanian shares were also among the day's biggest losers, falling over 2 percent. Russian shares skidded 2.7 percent as brent crude fell below $110 per barrel.

Oil-exporting Russia also led losses on the currency front, with the rouble down for the third straight day against the dollar with a 1 percent loss. Against its euro-dollar basket, the rouble traded at its weakest in nearly a week.

Fears of central bank intervention to weaken the Swiss franc boosted the Hungarian forint a touch against the Swiss currency.

However, the forint failed to make headway against the euro, falling 0.7 percent after Hungarian Prime Minister Viktor Orban warned of further revenue and spending measures to keep the budget deficit in check and lowered the government's 2011 economic growth forecast.

Israel's shekel fell nearly 1 percent to its lowest in a week versus the greenback after gunmen fired at Israeli vehicles near the country's border with Egypt.

South African government bonds extended gains on expectations monetary policy would remain accommodative after Finance Minister Pravin Gordhan warned that dimmer global growth prospects were creating an uncertain environment for South Africa.

"In spite of this rally we feel that rates will continue heading lower for now as the market keeps downgrading the global growth outlook," said Societe Generale in a note.

Copyright Reuters, 2011