(Corrects para 1 to say emerging equities (not currencies) fell more than 1 percent)
By Sujata Rao
LONDON, Sept 10 (Reuters) - Emerging equities fell more than 1 percent on Wednesday and currencies such as the lira and rand extended losses to trade at multi-month lows on growing expectations of a broad-based rally in the U.S. dollar.
The dollar is near 14-month highs versus a basket of major currencies and could breach levels not seen since 2010 after a paper from the San Francisco Fed indicated markets are well behind the curve in pricing the U.S. rate rise trajectory.
Emerging assets are suffering as a result, with MSCI’s benchmark equity index down for the fifth day in a row and taking its biggest one-day dive since end-July. On currency markets, economies such as South Africa and Turkey with large external funding requirements are looking especially vulnerable, losing over 1 percent each on Tuesday .
Domestic data is underscoring the fragility of some of these markets. South Africa’s second quarter current account deficit ballooned and Turkey posted below-forecast growth of 2.1 percent in the April-June period
“Turkey and South Africa are reminding us at an awkward time that fundamental healing in many emerging economies is making very poor progress,” said Manik Narain, a strategist at UBS.
He said the mood on emerging markets had been soured by the re-assessment on U.S. interest rates as well as by relatively weak Chinese data and a sudden rise in euro yields that reversed the rally sparked by the European Central Bank’s rate cut.
“On the U.S. cycle I think it’s obvious that the growth differentials between emerging markets and the United States are continuing to move in favour of the U.S., which argues for the dollar to be resilient if not stronger versus EM currencies.”
The lira fell 0.6 percent to the dollar after the data while the rand lost another 0.7 percent to head for the 11-per-dollar mark, not breached since February.
Earlier in the day, most Asian currencies weakened, led by the Philippine peso, which fell to a one-month low, and the Indian rupee, likewise falling 0.4 percent. The exception was the yuan which hovered at six-month highs after the central bank set a stronger midpoint fix.
Options markets are confirming the jitters over dollar strength. One-month implied volatility, a gauge of expected swings in currencies, jumped to 2-1/2-month highs on the lira while one-month risk reversals, which show demand for options on a currency rising or falling, are also showing bias for weaker emerging currencies .
“EM currencies should depreciate significantly against the U.S. dollar, particularly as U.S. Treasury yields are starting to turn trend,” Bank of America Merrill Lynch said in a note, referring to 10-year Treasury yields at one-month highs, a rise of 20 basis points since end-August.
In emerging Europe, a ceasefire between Ukraine and pro-Russia rebels appeared to be holding but this failed to lift Russian assets. Moscow-listed stocks fell half a percent while the rouble lost 0.4 percent to the dollar ahead of a European Union meeting to discuss new sanctions on Moscow.
The chairman of the Organisation for Security and Cooperation in Europe said it will deploy drones soon to step up its monitoring in Ukraine, and that the ceasefire should be given some time to produce a political dialogue before more sanctions are imposed on Russia.
Central European currencies were mostly flat against the euro though equity markets fell, especially in Budapest which was down 0.8 percent and Athens which fell 1 percent . Bond yields across the region also rose, with the Polish 10-year yield rising to 3 percent, a rise of 20 bps from the record high hit on Monday.
In bond news, Middle Eastern borrowers, Bahrain, Sharjah and Emirates NBD, were to price their deals later in the day while Poland and Turkey were tapping the Swiss franc and yen market respectively.
Sources also say Gazprom was starting investor meetings from Sept. 23 to raise money in euros and Swiss francs. If successful the issue could potentially open up the frozen bond market for Russian borrowers. Gazprom is not under sanction.
“Of all the Russian names it’s the one that has a path, though it will need to fine-tune its strategy, pricing and expectations,” one syndicate banker said. “Once it’s out, it will give more visibility as to what else can get done from Russia.”
For GRAPHIC on emerging market FX performance 2014, see link.reuters.com/jus35t
For GRAPHIC on MSCI emerging index performance 2014, see link.reuters.com/weh36s
For GRAPHIC on MSCI emerging Europe performance 2014, see link.reuters.com/jun28s
For GRAPHIC on MSCI frontier index performance 2014, see link.reuters.com/zyh97s
For CENTRAL EUROPE market report, see
For TURKISH market report, see
For RUSSIAN market report, see ) (Editing by Ruth Pitchford)