Russian assets lead sell off, EM stocks at 3-week lows

Published 07.04.2017 21:14

Russian assets led emerging stocks and currencies lower on Friday as a U.S. missile strike in Syria spooked investors wary about risks of a clash with Russia, while emerging equities fell to three-week lows but still look to end the week in the black. MSCI's benchmark emerging equities index was down 0.2 percent, mirroring a broad sell-off in riskier assets after the United States fired 59 cruise missiles at a Syrian air base from which it said a deadly chemical weapons attack was carried out earlier this week.

Russia said the missile strike broke international law and had seriously damaged U.S.-Russian relations. The rouble was down around one percent against the dollar and Russian dollar-denominated stocks fell 2.4 percent. The currency was also undermined by comments from the Russian economy minister suggesting the rouble could weaken in coming months.

"The current price action makes sense," said ING chief EMEA FX and rates strategist Petr Krpata. "The geopolitics in the region is not positive for the currency so what we see is a knee-jerk reaction. But unless these things are followed up and there is a further escalation, they do not usually last." The average yield spread of Russian sovereign bonds over U.S. Treasuries on the JPMorgan EMBI Global Diversified widened out by 7 basis points (bps) to 167 bps. Russian 10-year bond yields also rose 10 basis points to 7.95 percent, bouncing off three-year lows. Russian five-year credit default swaps also rose 5 bps from Thursday's close to 167 bps.

Other emerging assets to feel the heat included the Turkish lira, which weakened 0.3 percent, and Turkish stocks , which fell 0.2 percent. Turkey lent its support to the U.S. missile strike.

South African assets also remained under pressure following a ratings downgrade to junk amidst ongoing political turmoil. Thousands were expected to protest against President Jacob Zuma in major South African cities on Friday demanding that he resign. Zuma's sacking of respected finance minister Pravin Gordhan outraged allies and opponents alike.

Stocks fell 0.8 percent and the rand was set to end the week down 2.3 percent, although it steadied on Friday. Moody's has pushed back a ratings review that was expected to happen later on Friday.

China's yuan was a touch weaker against the dollar as U.S. President Donald Trump and Chinese President Xi Jinping began their summit, at which trade and security issues are likely to feature heavily. China's foreign exchange reserves rose slightly in March and remained above $3 trillion, as capital control measures and a pause in the dollar's rally helped contain capital outflows.

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