July 11, 2017 / 9:18 AM / a year ago

EMERGING MARKETS-Emerging currencies tumble in expectation of higher core rates

LONDON, July 11 (Reuters) - Emerging currencies suffered hefty losses on Tuesday, with the South African rand tumbling more than one percent at one point as investors sold down assets deemed most vulnerable to tighter global monetary conditions.

Global markets face a squeeze in coming months as the U.S. Federal Reserve starts unwinding its balance sheet and raises rates further,l while the euro zone too has hinted at reducing stimulus. That recently lifted Treasury and German yields to two-month highs and six-month highs respectively.

While emerging equities are seen as relatively resilient due to firmer growth and earnings, especially in Asia, currencies are likely to be at the sharp end, with the Turkish lira and South African rand regarded as vulnerable due to current account deficits and messy internal politics.

The rand hit two-month lows while the lira lost almost 1 percent to trade just off recent 2-1/2 month lows . The rouble, meanwhile shrugged off a slight oil price rise to also lose one percent to a new six-month low.

“A couple of things are changing. If you look at most of G10s there is a rise in real yields and it effectively indicates the period of abnormally low interest rates is coming to an end. That’s leading to reappraisal of what’s good value in G10 as well as emerging markets,” said Peter Kinsella, head of research at Commonwealth Bank of Australia

“Second is oil prices - OPEC are talking of further supply cuts which shows they are finding it hard to balance markets. Falling oil prices are net-net positive for G10 and net-net negative for EM.”

Kinsella said, however, that while currencies were the first line of defence, emerging equity and debt markets were supported by valuations which are less rich than during the 2013 selloff.

Also within emerging currencies, jitters over threats to the South African central bank’s independence and a continued crackdown in Turkey on people suspected of involvement in last year’s failed coup were exacerbating risks for these markets.

Asian currencies on the other hand were relatively solid, with the rupee and Korean won slipping only marginally.

JPMorgan said it had turned underweight in many EMEA emerging currencies, but named the rand its “hedge of choice” due to domestic as well as external risks.

“The political climate in South Africa is likely to remain excessively noisy till the end of the year, tail risks of local bond ratings downgrades are growing, and investors till now have been too sanguine on the outlook for local markets,” JPM said in a note to clients.

However, MSCI’s benchmark emerging equity index rose 0.7 percent as shares tracked global stocks higher. In bond markets, Indonesia continued to market bonds, even adding a euro tranche to the two-dollar tranches, quoting its 10-year dollar note at 4.25 percent.

Societe Generale strategist Regis Chatellier said he had adjusted his portfolio in favour of shorter-duration emerging debt especially in central Europe, to guard against the rise in core rates. “After such a long rally a reduction in balance sheets is going to hurt a bit,” he said.

In the Gulf, stocks were marginally higher , shrugging off a statement from four Gulf states seeking to step up pressure on Qatar.

For GRAPHIC on emerging market FX performance 2017, see tmsnrt.rs/2e7eoml For GRAPHIC on MSCI emerging index performance 2017, see tmsnrt.rs/2dZbdP5

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see) Emerging Markets Prices from Reuters Equities Latest Net Chg % Chg % Chg

on year

Morgan Stanley Emrg Mkt Indx 1016.60 +7.31 +0.72 +17.90

Czech Rep 998.70 -0.30 -0.03 +8.36

Poland 2302.82 +2.16 +0.09 +18.22

Hungary 35695.65 -29.27 -0.08 +11.54

Romania 8147.50 +35.34 +0.44 +15.00

Greece 845.38 +1.55 +0.18 +31.34

Russia 997.11 -9.03 -0.90 -13.47

South Africa 46418.72 +442.16 +0.96 +5.73

Turkey 01476.17 +379.01 +0.37 +29.87

China 3203.18 -9.45 -0.29 +3.21

India 31865.60 +149.96 +0.47 +19.68

Currencies Latest Prev Local Local

close currency currency

% change % change

in 2017

Czech Rep 26.15 26.08 -0.26 +3.27

Poland 4.24 4.23 -0.20 +3.79

Hungary 308.02 307.81 -0.07 +0.26

Romania 4.57 4.57 +0.05 -0.67

Serbia 120.12 120.09 -0.02 +2.69

Russia 60.74 60.19 -0.90 +0.87

Kazakhstan 327.71 325.89 -0.56 +1.81

Ukraine 25.97 25.99 +0.09 +3.97

South Africa 13.58 13.48 -0.70 +1.15

Kenya 103.90 103.80 -0.10 -1.47

Israel 3.57 3.55 -0.57 +7.98

Turkey 3.64 3.61 -0.78 -2.98

China 6.80 6.80 +0.05 +2.11

India 64.54 64.45 -0.14 +5.28

Brazil 3.26 3.25 -0.04 -0.09

Mexico 18.04 17.95 -0.45 +14.86

Debt Index Strip Spd Chg %Rtn Index

Sov’gn Debt EMBIG 327 -2 .00 7 81.07 1

Editing by Mark Heinrich

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