US Fed fears pummel emerging markets; stocks fall 2.5 pct

London (Sept 12)  Fears of an imminent U.S. raterise along with higher bond yields in developed markets hitemerging assets on Monday, with the main equity index tumbling2.5 percent and currencies weakening against the dollar.

U.S. and German 10-year yields were at the highest in 2-1/2months, rising further after Friday's spike caused byspeculation the U.S. Federal Reserve could move interest ratesthis month, instead of December as markets had reckoned.

With U.S. stocks falling around 2 percent on Friday,emerging markets, like other riskier assets, felt the heat.MSCI's benchmark emerging equity index hit one-month lows for the biggest daily loss since immediately after theBritain's referendum vote to leave the European Union.

The index fell 1.9 percent on Friday.

"(Boston Fed President Eric) Rosengren's comments last weekreally set this (sell-off) in motion, with his more hawkishcomments... and that mood has continued now on Monday," SEB'schief emerging markets strategist Per Hammarlund said, addinghowever he saw the current moves as a "blip".

He expects other Fed speakers to quash the hawkish tone,adding: "I think the data is a bit too weak and too unconvincingfor them to already hike in September."

Hammarlund said markets also were rattled by a rise inChinese overnight rates on offshore yuan to seven-month highs . Speculation has grown of a liquidity squeeze tocontrol yuan depreciation via offshore markets.

"(The PBOC) is trying to make offshore yuan funding moreexpensive, driving up forwards quite sharply and I suspect thatwill eventually squeeze out some long-dollar yuan forwards, butfor now it is touching off a bit of a risk-off mood," he added.

While onshore-traded yuan was supported by reports of dollarsales by state-run banks, local stocks fell around 2 percent while Hong Kong listed H-shares slumped 3.4 percent for their biggest one-day fall since February.

Emerging markets appear all the more vulnerable to a shiftin Fed expectations, given emerging debt and equity funds havereceived bumper inflows in recent months Bonds came under pressure, with yields on South Africa'sbenchmark, one of the most liquid in emerging markets, nowalmost 20 basis points higher than Thursday's close and Russian 10-year yields up about 24 bps.

Yields on JPMorgan's GBI-EM local debt index rose around 7basis points on Friday and dollar bond yield spreads overTreasuries at a five-day high .

On currency markets, the South African rand and Turkish liraweakened close to 1 percent to the dollar whileoil's 1 percent fall drove the rouble 0.6 percent lower BNP Paribas analysts predicted any shakeout would be farsmaller than the 2013 'taper tantrum'.

"Although a September rate hike would trigger a correctionin EM, we continue to think that the eventual impact on EMassets will be manageable, as we expect the Fed to indicate amodest upward trajectory for interest rates," they added.

In central Europe, the Hungarian forint slipped 0.4 percentto three week lows to the euro while the Czech crownstrengthened further in forward markets amid expectations thecurrency's 27-per-euro exchange rate cap will be scrapped.

Six-month euro/crown forwards fell 7 percent but stayed offrecord lows hit on Friday . The forwards are pricingthe crown well above its current 27 per euro rate where the central bank is holding it.

"They pledged to keep it until 2017 - but they have all goodreasons to drop the floor earlier," Hammarlund said. "One isthat the economy is red hot...The second thing is they areaccumulating reserves and the longer they wait, the more of anFX loss they are going to do on the reserves."

Croatia's kuna was flat after the conservative HDZlooked set to win parliamentary elections . Its hardcurrency bonds weakened across the curve with the 2020 dollarissue down half a cent while its euro debt slipped 0.2 cent.

Source: Reuters