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Stocks, currencies set for quarterly loss as dollar dominates

01 October 2014, 08:35

Nairobi - Emerging equities were set for their biggest quarterly loss in more than a year and currencies traded at multi-months low against a rising dollar, with Russian stocks and the rouble among the worst performers of the past three months.

On the debt front, emerging bond spreads were at their widest since March, having blown out 50 basis points over the quarter on the EMBI Global index.

With the dollar scaling new heights and volatility ticking up, there was little to cheer emerging market investors going forward said Erste Bank's Henning Esskuchen.

"What we are seeing is a change from the summer when markets were just starting to get uneasy about central bank action. That rally evaporated because of new negative top-down themes that wiped out any positives," said Vienna-based Esskuchen, an emerging equity strategist.

Emerging market stocks hit a four-month low, dipping 0.2 percent, and are now up just 0.5 percent this year.

The biggest drag came from Russia, where the dollar-denominated RTS index clocked up a loss of 18.59 percent since January. The rouble meanwhile has weakened 16.47 percent against the dollar in this period.

"We had worsening newsflow from Ukraine, a stronger dollar and weaker growth performance - all of which is adding to bearish sentiment," Esskuchen said.

Ukraine's state-owned gas company Naftogaz has a $1.67 billion bond maturing today, a debt it has pledged to honour.

Markets are also edgy over unrest in Hong Kong, where thousands of pro-democracy protesters are staging demonstrations. That pushed Hong Kong stocks to its biggest monthly fall since May 2012, down more than 7 percent.

Chinese credit default swaps hit new six-month highs around 90 basis points, Markit said.

However, the two main Chinese indexes in Shanghai and Shenzhen had their best quarter in four years, gaining 13 and 15 percent respectively .

Most emerging currencies were also on track to weaken over the quarter and are down since the start of the year, with the exception of Romania and India. Currencies in Asia hit multi-month lows, with the Indonesian rupiah at eight-month lows and the won at six-month troughs.

The currency losses threaten to erode gains in asset classes such as equities and domestic bonds. The latter is down 5 percent on average in September on the GBI-EM index, erasing all year-to-date returns, according to JPMorgan.

"We reiterate our view to be underweight emerging currencies, while our recommendation to be selectively overweight bonds is coming under pressure," JPMorgan analysts said in a note to clients.

Romania's leu traded flat on the day though it has gained 1.2 percent against the euro since the start of the year.

Romania's central bank is widely expected to cut interest rates by 25 basis points on Tuesday. It could also say how it plans to end a liquidity shortage in domestic markets that have put upward pressure on money market and debt interest rates.

In India, the Reserve Bank held interest rates steady and signalled it would refrain from cutting until it is confident consumer inflation can be reduced to its target.

Elsewhere, Kenya changed the base for calulating gross domestic product to 2009 from 2001, adding 25 percent in the process and sending the east and sending the nation into the top 10 of Africa's largest economies.

Argentina's bond yield spreads versus U.S. Treasuries widened 15 bps after a U.S. judge held the country in contempt late on Monday, saying it was taking "illegal" steps to evade his orders in its dispute with hedge funds.

- Reuters

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