May 29, 2018 / 10:53 AM / 5 months ago

UPDATE 2-South Africa's rand, stocks drop as Italy turmoil sparks emerging market retreat

(Updates rand, add bonds and stocks closing prices)

JOHANNESBURG, May 29 (Reuters) - South Africa's rand fell against the dollar on Tuesday as political turmoil in Italy hit global risk appetite, stoking a selloff in emerging market currencies and stocks as investors looked to buy safe-haven assets.

At 1521 GMT the rand was 1.2 percent weaker at 12.6125 per dollar from its Monday's close, erasing the small gains eked out in the previous session following S&P Global Ratings' decision on Friday to keep its credit rating on South Africa steady.

Italy's anti-establishment 5-Star and League parties abandoned plans to form a government at the weekend, leaving investors concerned the crisis could trigger an economic slowdown in the euro zone, with implications for demand for emerging market goods and services.

"We saw the rand weaken already during Asian trade on the back of Italian default concerns and that's led to widespread risk aversion," said senior trader at Standard Bank Oliver Alwar. "Stocks are also lower and the dollar has strengthened across the board."

The rand led the emerging market currency slide, while other big fallers included India's rupee and Mexico's peso .

"While local fundamentals have improved, over the past two months the rand has really been trading on external factors. We've seen the capitulation in Turkey and Brazil and before that the U.S.-China trade wars. That's what's been driving the rand," Alwar said.

Government bonds also declined, with the yield on the benchmark 2026 paper rising 9 basis points to 8.53 percent at the local market close.

On the bourse, the blue-chip JSE Top-40 index fell 1.8 percent to 49,622 points and the broader All-share index lost 1.6 percent to 55,935.

Steinhoff Africa Retail was down 0.3 percent, recouping some of the losses suffered earlier after it scrapped half-year dividend payouts. (Reporting by Mfuneko Toyana and Ed Stoddard Editing by James Macharia and David Holmes)

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