Fresh Turbulence Drives Down Currencies, Bonds Again

Fresh waves of turbulence engulfed emerging markets on Friday, with a renewed slide in the Russian rouble and a sharp rise in bond yields across the board despite policymakers' efforts to staunch the bleeding.

Signs grew that stress is increasingly spreading to central European countries such as Poland and Hungary, which fared relatively well in the first sell-off phase earlier this month.

Poland delayed publication of its monthly debt supply plan until next week due to market turbulence and an overhaul of its pension scheme, a day after Hungary was forced to cut a T-bill action because of a 67 bps jump in yields.

"We are in a negative feedback loop of weak currencies, higher interest rates, weak growth and capital outflows. This feedback loop needs to play out and that means at the end of the day EM assets need to become much cheaper," said David Hauner, head of EEMEA fixed income strategy and economics at Bank of America Merrill Lynch.

"Only then will people come back to buy," he added.

Hungary's central bank was the latest to wade in with assurances that it would act to soothe markets if needed, adding to earlier verbal intervention from India and Russia, as well as big rate rises in Turkey and South Africa.

But the Hungarian forint fell 1.5 percent to the euro , hitting two-year lows, while bond yields jumped 20 basis points across the curve.

"Fears are growing that if the central bank cannot stop the forint's fall in any other way, this will lead to an interest rate hike in the end," a bond trader in Budapest said.

In neighbouring Poland, 10-year bond yields rose 10 basis points to a 4-1/2 month high after the government delayed its debt supply plan and the zloty lost 0.5 percent.

The spotlight remains on the rouble. A rally that started late on Thursday proved short-lived, taking the Russian currency down more than 1 percent, back towards five-year lows against the dollar.

Analysts said the central bank's plans for "unlimited interventions" should the rouble stray outside a target band, had squeezed out short rouble positions on Thursday but the broad trend for flight was very much intact.

The lira and the rand fell almost 1 percent and South African domestic bond yields hit the highest since mid-2011, as markets priced in more rate rises in coming months.

In equity markets, MSCI's main emerging markets index traded just off 4-1/2 month lows and are on track for their biggest monthly loss since mid-2012.

Domestic emerging bond yields have risen around 40 basis points since the start of January and sovereign dollar bond yields have jumped about 50 bps this month on JPMorgan indices.

Pressure is mounting on other emerging central banks to defend their currencies, with Mexico likely to warn later on Friday that it is ready to raise interest rates if needed. The peso is trading just off 18-month lows.


BofA/ML's Hauner said the moves were being exacerbated by thinner liquidity, caused by the lunar New Year holidays across much of Asia including China where weaker-than-expected growth data was at least partly behind the latest sell-off of emerging market assets.

That added to jitters regarding the U.S. Federal Reserve, which confirmed on Wednesday it would shave another $10 billion from its monthly money printing.

"What's driving this is the fear of a Chinese slowdown and what I want to see is some kind of policy action from the People's bank of China (PBOC)," said Lars Christensen, chief emerging markets analyst at Danske Bank.

India's central bank governor Raghuram Rajan has slammed what he called a breakdown in global monetary coordination, saying developed countries could not "wash their hands" of the turmoil caused in emerging economies by their actions.

Christensen said that in the absence of PBOC input, emerging central bank action, interventions or policy tightening, was unlikely to be effective.

"Russia has indicated they will defend the rouble vigorously (but) my fear is a repeat of 2008 when they spent $200 billion to defend an artifical rouble peg," he said.

Russian 5- and 10-year bond yields rose to 16-month highs, pricing in the likelihood of an interest rate rise in February.

Russian weakness is partly behind the 2.5 percent tumble in the Ukrainian hryvnia, analysts said, referring to the currency's biggest one-day loss since 2009.

But respite from the Fed or China is unlikely, analysts say, noting China wants to engineer a slowdown in its economy while the United States has flagged its plans well in advance.

Hauner expect more pain ahead for emerging markets.

"What's going on now is not the fault of the Fed," he said. "The turmoil is down to China but also the fact that EM currencies and interest rates were misaligned," he said. "We are now around fair value but as history shows us, any selloff in these has a tendency to overshoot."