Emerging market sell-off worsens, more pain ahead

Thu Aug 22, 2013 7:34am EDT
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By Sujata Rao

LONDON (Reuters) - Heavy selling engulfed emerging markets again on Thursday with more currencies falling prey to fears of higher global borrowing costs and a reduction in cheap cash supplies from the United States.

While the Indian rupee and Turkish lira skidded to new record lows against the dollar and the Indonesian rupiah slumped to fresh four-year lows, currencies such as the Mexican peso and the Korean won that have so far been spared the worst of the recent selloff, are also now feeling the heat.

Market expectations that the U.S. Federal Reserve will start cutting back its $85 billion-a-month money printing program from September were maintained after minutes from the U.S. central bank's July meeting gave little new guidance on timing. That drove a fresh spike in U.S. 10-year yields, the risk-free rate against which all assets, including emerging markets, are benchmarked.

"U.S. yields will go higher - that is obvious - and no one wants to be exposed to assets in emerging markets which are very sensitive to U.S. monetary policy," said Maarten-Jan Bakkum, investment strategist for ING Investment Management's emerging market funds.

As U.S. Treasury yields hit new two-year highs - they stand around 120 basis points higher than early-May levels - more and more investors dumped emerging assets.

Emerging equities fell for the fifth straight session to bring 2013 losses to 13 percent .MSCIEF. Bonds in emerging currencies also sold off with average yields at almost 7 percent on the main GBI-EM index - the highest in more than two years.

Currency weakening accelerated, forcing central banks to step up their efforts to stem it.

Turkey pledged to increase dollar sales to sell $350 million on Thursday after the lira hit a record low for the second day in a row but analysts called for more steps. Turkish stocks shed over 2 percent .XU100 while bond yields rose.   Continued...

An employee poses with the bundles of Indian rupee notes inside a bank in Agartala, the capital of India's northeastern state of Tripura August 22, 2013. REUTERS/Jayanta Dey