October 27, 2017 / 10:08 AM / a year ago

EMERGING MARKETS-Contagion warnings as reeling rand hits 11-mnth low

* Rand hit lowest in 11-months, bonds slide on downgrade fears

* Turkish lira falls to weakest in three weeks

* Nigeria stocks spared MSCI index relegation

* Stocks set for 2nd week of falls as dollar flexes muscle

By Marc Jones

LONDON, Oct 27 (Reuters) - A emerging market selloff was in danger of snowballing on Friday, as South Africa’s budget woes sent the rand to an 11-month low, Turkey’s lira dropped for a sixth day and EM bond and stock markets racked up a second week of losses.

Worries that South Africa could soon lose its remaining investment grade credit ratings knocked another 0.3 percent off the rand, taking its slump to more than 4.5 percent since the government ramped up deficit forecasts on Wednesday.

That was set to be its second worst week of the and the country’s bonds were also on the ropes as yields climbed to their highest in 18 months. The yield on the benchmark 2026 bond rose to 9.3 percent having started the month at 8.5 percent.

“Our base case is that they (South Africa) don’t get downgraded until next year. But we will be keeping a close eye on the politics,” said Yacov Arnopolin, portfolio manager for emerging markets portfolios at Pimco.

“We are currently neutral local currency debt in South Africa, and that’s worked out nicely in the last couple of days.”

Turkey, another traditionally volatile EM performer, also remained under pressure, hit by concerns about monetary policy and Ankara’s souring relations with key allies.

Turkey’s central bank kept key interest rates steady as expected on Thursday, resisting calls to tighten policy after core inflation spiked to a 13-year high last month.

The lira dipped as far as 3.8430, its weakest level in some three weeks, bringing its losses against the U.S. currency this year to more than 8 percent. It touched a record low of 3.9417 in January.

Bond yields were rearing up there too, with the benchmark 10-year bond yield going as high as 12.15 percent.

“We have known the Turkish problems for the while,” said Credit Agricole strategist Guillaume Tresca. “But the fact is the market was very long the lira to catch the carry, and now the pressure is gradually rising and some people are unwinding their positions.”

Broad based dollar strength was making life difficult generally for emerging markets too. Many developing countries do much of their borrowing in dollars, so its rise make paying back those debts potentially more expensive.

Among Asian currencies, the Indonesian rupiah fell to its lowest in more than 16 months although the South Korean won weakened the most. The Taiwan dollar, Malaysian ringgit, Singapore dollar and Chinese yuan were are all on track for their second week of losses.

Central and eastern Europe currencies were also dragged down in the downdraft of the euro which had seen its biggest fall of the year on Thursday after the ECB showed it was treading carefully as it bids to end its stimulus.

Czech and Romanian bond yields hovered at their highest in over three years on a mix of local rate hike expecations in the former and political uncertainty in the latter.

One brighter note was in Nigeria. Influential index provider MSCI said it was no longer considering relegating Nigerian stocks from its widely-tracked frontier market index.

Its central bank head also said he expected inflation rates to fall at a faster pace and hit high-single digit rates mid-next year.

“We are very optimistic that food prices will come down, and as they come down it will help to complement the reduction in core inflation,” Emefiele told journalists on the sidelines of an investment conference at the London Stock Exchange.

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) (Reporting by Marc Jones; Editing by Toby Chopra)

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