IMF warning, oil prompt profit-taking

By Sujata Rao

LONDON (Reuters) – Emerging stocks tumbled over 1 percent to a two-week low on Tuesday after the International Monetary Fund (IMF) warned of new threats to economic recovery, prompting investors to book profits off the recent rally.

A sharp tumble in oil and commodities, fueled by a Goldman Sachs report advising investors to lock in profits, also took the edge off commodity-reliant emerging markets like Moscow and Johannesburg, though by 1030 GMT Brent crude futures had started reversing losses.

The IMF said on Monday that soaring oil prices and inflation in emerging economies posed dangers to the economic recovery, though the risks were not big enough to derail growth.

It also warned Asia’s overheating economies could suffer a hard landing and trimmed the growth outlook for the United States and Japan, respectively the world’s No. 1 and No. 3 economies.

“The falls are probably triggered by the IMF but the market has been very strong in the last few weeks so people are happy to take a bit of profit,” said Marten-Jan Bakkum, emerging markets strategist at ING Investment Management in The Hague.

“But the issues mentioned by the IMF are very relevant… Inflation problems in emerging markets are not over so we don’t believe the recent EM outperformance can continue.”

Emerging stocks on the MSCI (.MSCIEF: Quote, Profile, Research) fell 1.3 percent by 1030 GMT, the second day of losses after a three-week rally. Following a dismal first two months of 2011, the index rallied 6 percent in March, bringing returns back into the black.

Russian stocks, which rallied this month to nearly three-year highs thanks to oil’s recent run, led Tuesday’s rout, falling 2 percent (.IRTS: Quote, Profile, Research) though they trimmed losses as oil’s declines faded.

Another commodity-heavy bourse, Johannesburg (.JTOPI: Quote, Profile, Research), lost 1.7 percent.

Eastern European stocks fell 0.7 percent (.TRXFLDEEPU: Quote, Profile, Research), while earlier the Korean, Taiwanese and Indian markets all shed around one percent, spooked also by news that Japan had revised up its assessment of the Fukushima radiation leak.

Turkish markets fell half a percent (.XU100: Quote, Profile, Research).

FX AND BONDS LOSE

Emerging currencies also lost ground, with the rouble retreating off late-2008 highs against the broadly stronger dollar while the rand, which rose recently to three-month highs to the dollar, fell almost one percent.

In central Europe, the Hungarian forint fell 0.3 percent to the lowest since end-March, despite data showing March inflation accelerating to 4.5 percent.

That reduced chances of an interest rate cut to boost growth and pushed bond yields up 3-5 basis points across the curve.

Analysts said the big surprise was the faster-than-expected rise in food prices, which shows inflation getting entrenched.

“No need of a rate hike yet, but if this trend continues, the next step could be a rate hike some months later,” said Gyorgy Barcza, analyst at K&H Bank in Budapest.

On fixed-income markets, JP Morgan’s emerging sovereign bond index widened 3 basis points to 251 bps over U.S. Treasuries after rallying over 10 bps in the first week of April. The broader EMBI Global saw spreads rise 2 bps to 285 bps.

The underperformer on the index was Ivory Coast which saw spreads widen 10 bps despite news that Alassane Ouattara, the internationally recognized president, had taken charge of the country, raising hopes of an end to over four months of conflict.

The 2032 dollar bond was trading around 52 points, below recent four-month lows as investors remained unsure if a missed coupon would be paid in June, along with the next due payment.

“We do expect the bond to rise. It was trading in the low-60s last year and that’s the target to get to,” said Sergei Strigo, head of emerging debt at Amundi Asset Management.

“But first we need to see some normalizing of the situation, the government being formed and obviously a statement on the resumption of coupon payments.”

Nigeria’s 2021 bond stayed steady around 102 as incumbent Goodluck Jonathan is widely expected to win next weekend’s presidential election even though his ruling party lost ground in the legislative vote.

Strigo said he expected the bond to perform well if Jonathan wins the election, though it had already enjoyed a significant rally recently.

“I am not sure to what extent (it will rise) but we are comfortable holding the bond,” he added.

(Editing by John Stonestreet)

IMF warning, oil prompt profit-taking