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

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LONDON (April 7): Russian assets led emerging stocks and currencies lower on Friday as a US 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%, 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 US-Russian relations.

The rouble was down around 1% against the US dollar and Russian dollar-denominated stocks fell 2.4%. 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 US 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%, 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%, and Turkish stocks, which fell 0.2%. Turkey lent its support to the US 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% and the rand was set to end the week down 2.3%, although it steadied on Friday. Moody's has pushed back a ratings review that was expected to happen later on Friday.

Investors were also wary ahead of US non-farm payrolls data due later today, as a strong number could bolster expectations of as many as three more Fed rate hikes this year.

"We are not far from two hikes, but we need to get some really good data or some big moves from Trump on tax cuts for example for the market to start pricing in more Fed hikes again," said Krpata.

China's yuan was a touch weaker against the US dollar as US 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 US dollar's rally helped contain capital outflows. Trump is thought unlikely to formally declare China a currency manipulator next week.

The Czech crown was steady at 26.62 per euro after jumping 1.7% on Thursday when the central bank removed the currency cap.

Investors had bet heavily on the exit, prompting the central bank to buy an estimated 70 billion euros since 2013 to defend the cap, with more than half of that coming in the past three months.

The 2020 and 2021 dollar-denominated bonds of Venezuela's state oil company PDVSA were trading up over 1 US cent in the US dollar after it started bank transfers to make its first April bond payments. Venezuela's sovereign 2026 and 2038 issues were also up 1-1.7 US cents.