EMERGING MARKETS: Fed, Greece squeeze EM assets; debt spreads rise to 400bps vs Treasuries

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U.S. Stocks FluctuateEmerging dollar bonds’ premium over Treasuries briefly rose to 400 basis points on Wednesday for the first time since April and currencies fell as nervousness grew over Greece and a Fed meeting later in the day.

It looks increasingly unlikely that a Thursday meeting of European Union finance ministers will make progress on preventing a Greek default while the U.S. Federal Reserve is expected to signal a September rate increase later in the day.

A slight rise in global equity sentiment pushed emerging equities half a percent off 2 1/2-month lows, lifted also by a 1 percent rise in Chinese markets . But dollar bonds underperformed Treasuries, failing to keep up with a fall in 10-year U.S. yields .

Currencies continued to retreat against the dollar and euro. The Polish zloty and Hungarian forint both slipped 0.2 percent versus the euro . The zloty also fell 1 percent to the Swiss franc, a potential worry for holders of franc-denominated mortgages.

“The pressure has eased a bit today but (eastern Europe) remains very sensitive to Greek developments. We expect more Swiss franc appreciation in the short term, which could add some pressure on the zloty,” said Guillaume Tresca, a strategist at Credit Agricole in Paris.

Bourses in Bulgaria, Serbia and Romania, which have trade and banking links to Greece, stabilised after steep falls .

Tresca advises clients to sell 10-year Polish bonds, where yields have hit 10-year highs, predicting longer-dated yields across the region to bear the brunt of the selloff after months of rallying as investors dash for the safety of Bunds.

Emerging asset volatility would also rise with the approach of the first Fed rate hike in nine years, he said, adding that more developing countries would also tighten policy.

Latest South African data showing headline inflation at 4.6 percent signalled a July rate rise remains on the cards. The rand slipped 0.6 percent.

Turkey too is seen raising rates to guard the lira – down 0.3 percent on the day – as political uncertainty rises following elections.

Deutsche Bank predicted more pressure on emerging equities.

“The MSCI EM has been in a range for four years and I would expect a break to the downside if the Fed embarks on tightening. The ratio of (S&P500 to MSCI EM) is 3 percent off post-2010 highs and further strength in dollar vs EM currencies should lead to additional liquidation of unhedged EM portfolios,” it told clients.

Economic data has also failed to reassure. Singapore extended Asia’s run of poor trade data, showing declining exports and forcing analysts to trim growth expectations. The Singapore dollar fell 0.3 percent versus the greenback.

For GRAPHIC on emerging market FX performance 2015, see link.reuters.com/jus35t

For GRAPHIC on MSCI emerging index performance 2015, see link.reuters.com/weh36s

For GRAPHIC on MSCI emerging Europe performance 2015, see link.reuters.com/jun28s

For GRAPHIC on MSCI frontier index performance 2015, see link.reuters.com/zyh97s

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see ) (Editing by Larry King)

 

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