EMERGING MARKETS-Stocks, FX hit by doubt over central bank moves
LONDON, June 13 (Reuters) - Emerging market stocks dropped on Thursday and local currencies came under pressure as investors piled into the relative safety of the Japanese yen, driven by a host of doubts over central bank moves around the world.
Central banks from India to Turkey have acted this week to stem currency losses, and on Thursday the Indonesian rupiah was boosted by a surprise central bank rate hike.
Investors were unwinding short bets on the yen - which surged nearly 2 percent to a 10-week high against the dollar - and long positions on equities, shoving the Nikkei down more than 6 percent.
Markets have been shaken by doubts over the next moves of major central banks such as in Japan and the United States.
The benchmark MSCI emerging stock index slid 2 percent to 11-month lows but trimmed some of those losses to trade 1 percent down on the day at 1500 GMT, helped by stronger-than-expected data on U.S. retail sales. The index has lost 11 percent this year.
Sovereign dollar bond spreads reached their lowest in a year earlier on Thursday, before tightening five basis points to 339 bps over Treasuries.
Emerging assets are likely to stay under pressure, however, at least until next week's meeting of the Federal Reserve, which could provide clarity on when it will scale back its bond-buying plan.
"We are seeing an unwinding of carry trades in the FX space, and that is impacting most emerging markets and especially high-yield currencies," said Murat Toprak, emerging markets strategist at HSBC in London.
Carry trades involve borrowing in low-yielding currencies to by assets in higher-yielding ones.
"The expectation had been of outflows from Japan towards the emerging markets space but we are seeing the opposite," Toprak said.
New issues from emerging market borrowers have dried up to one-tenth of normal levels this month, according to Thomson Reuters data, as investor flight from high-yielding assets pushes up borrowing costs.
"We are going to enter a period where external financing conditions for emerging markets will become much tighter, much more challenging," said Neil Shearing, chief emerging market economist at Capital Economics.
"That probably means weaker growth with it."
Foreign investors dumped Asian stocks, pushing the Seoul market to seven-month lows while Shanghai fell almost 4 percent and the Bangkok market lost 5.5 percent.
Emerging currencies also saw big losses, forcing several central banks to wade in. The Indian rupee hit record lows despite central bank action the previous session, while Indonesia raised interest rates in a move seen as driven by the need to defend the rupiah, which is at 3-1/2 year lows.
The currency losses are also linked to selling of local currency debt, where yields on the main GBI-EM index are now at 6.18 percent, up a percentage point from early May levels.
Emerging European assets enjoyed a U.S. data-driven turnaround, however. The Russian rouble rose 0.77 percent and stocks edged off earlier one-year lows. The Polish zloty gained 0.5 percent.
Turkish stocks fell 0.5 percent though the lira firmed slightly on the back of a slightly calmer political situation. The forint rallied 1 percent as markets priced out further interest rate cuts.
Brazilian stocks gained 0.5 percent from the previous day's August 2011 lows, in line with a positive Wall Street open, and Mexican stocks pulled off 11-month lows.