LONDON: Emerging stocks plumbed a 2-1/2 month low on Friday as the political stalemate in Egypt weakened investors’ appetite for risk, while resulting higher oil prices lifted the rouble to a 8-1/2 month high.
MSCI’s emerging index shed 0.6 percent by 1200 GMT, underperforming global equities and taking this week’s losses to over 4 percent so far.
"Everything is looking weaker across the board. The situation in Egypt is one factor. Markets don’t like uncertainty and it’s unclear how this ‘velvet transition’ some investors had expected will pan out," said Tim Ash, head of CEEMEA research at RBS.
Egyptian stocks make up less than 1 percent of the emerging market index, but unrest in the Arab world’s most populous nation has spurred the investor shift back to developed markets, which are displaying signs of a quickening economic recovery.
The cost of insuring Egyptian sovereign debt against default rose 39 basis points to 380 bps as protests entered their 18th day. Five-year credit default swaps (CDS) for other countries in the region were also up, with CDS for Morocco 10 bps higher and those for Israel 5 bps.
Emerging market equity funds including exchange traded funds haemorrhaged $3 billion in the week ending Feb. 9, data from EPFR showed.
"Emerging markets are struggling with the investor outflows we’ve seen in recent weeks. The rouble is benefiting from being an oil play," Ash said.
The rouble rose to an eight-month high against its euro-dollar basket, lifted by expensive oil and the upcoming month-end tax payment period, when exporters will need to convert dollars to meet local liabilities.
Tensions in Egypt have pushed Brent crude futures over the $101 per barrel mark, supporting oil-exporters like Russia, but adding to concerns over inflation in countries such as Turkey.
Turkey’s lira waned 0.5 percent versus the dollar on news the country’s current account deficit — the Achilles’ heel of Europe’s fastest-growing economy — widened 132 percent to a record high of $7.529 billion in December.
The above-forecast current account deficit is stoking concerns that the central bank may seek to weaken the lira further still in a bid to boost exports relative to imports.
Higher inflation, however, could put pressure on the bank to turn back from the cuts it has made in interest rates as part of that strategy.
"We believe that in Turkey, the central bank will ultimately be forced to operate a radical shift in its monetary policy stance and forecast some rate hikes starting already in the second quarter," said analysts at Societe Generale in a note.
Turkish stocks slipped half a percentage point but bond yields were steady, awaiting a central bank decision next week for direction.
Elsewhere, South Africa’s rand fell towards a fresh six-month low against the dollar, weighed down by data showing manufacturing output growth slowed to just 0.2 percent year-on-year in December.
The rand has weakened more than 10 percent against the dollar since the start of the year as the South African Reserve Bank (SARB) stepped in to keep the currency in check following a spike in December.
Meanwhile, Hungarian stocks gained 0.7 percent, retracing part of a steep four-session drop.
Hungarian shares had rallied 10 percent since the start of the year on optimism about forthcoming fiscal reforms until disappointing industrial output data on Tuesday wiped out more than half those gains.
The forint was flat ahead of a government news conference later on Friday, when it may disclose details of the reforms.
"They had better come out with something convincing," a dealer said. "If they disappoint, the forint will continue its slide for sure." –Additional reporting by Sebastian Tong in London and Marton Dunai in Budapest