EMERGING MARKETS-Dollar, politics hurt emerging assets; Saudi bond awaited

By Sujata Rao

LONDON, Oct (HKSE: 3366-OL.HK - news) 12 (Reuters) - Emerging stocks slipped to nearly two-week lows on Wednesday, hit by dollar strength and global equity falls, while South African assets hovered near multi-week lows on worries the country's finance minister could be forced from office.

MSCI (Frankfurt: 3HM.F - news) 's emerging equity index was also pressured by continued weakness in one of its biggest constituents, South Korea, where Samsung shares hit a new one-month low, keeping Seoul stocks and the Korean won at three-week lows .

Another big index loser was Thailand where stocks fell a further 3.6 percent to seven-month lows while the baht fell another 0.8 percent extending falls triggered by news that the 88-year old king's health was unstable.

Thai credit default swaps (CDS) rose eight basis points (bps) to 97 bps, the highest since mid-July, Markit (NasdaqGS: MRKT - news) data showed.

But aside from domestic woes, emerging assets are being weighed down by the dollar, which is near seven-month highs . Weak U.S. company earnings also soured the mood, dragging global equities lower.

"There's a conviction in the market that there will be a (U.S. interest rate) hike in early December and that's the main driver right now so the market could be under pressure," said Regis Chatellier, a strategist at Societe Generale (Swiss: 519928.SW - news) in London.

South African markets extended losses, with the rand dipping to new two-week lows, while local bond yields rose further to one-month highs after prosecutors ordered Finance Minister Pravin Gordhan to appear in court on Nov. 2 to hear fraud charges against him.

Investors fear that South Africa's investment-grade credit rating will be lost should Gordhan, who is respected by financial markets, be forced from office, potentially causing big outflows from stock and bond markets.

South African dollar bond yields stayed near three-month highs and while the Johannesburg equity index was flat, the index of banking shares fell another one percent.

Liam Spillane, head of emerging debt at Aviva Investors, said a favourable external backdrop in recent months had prompted many to overlook political risk and pile into South African assets.

"We are aware there has been a growing overweight position in South African bonds and (the events) tell us that perhaps the market was too complacent. There could be overweight (bond) positions in weaker hands that are forced to reconsider," Spillane said, adding that he trimmed holdings last week.

Turkey meanwhile posted a bigger-than-expected current account deficit in August, though the gap narrowed from July. The lira hovered just off 2-1/2 month lows to the dollar.

The data highlights Turkey's reliance on external funding. Chatellier of SocGen (Paris: FR0000130809 - news) said attracting direct investment to plug the deficit could prove harder in future given its recent rating downgrade to junk.

"The deterioration of the business environment and lower growth means that it could become more of an issue but right now it's not an immediate threat. You get paid for the risk you're taking," he said referring to the high yields on Turkey's local and external government bonds.

In bond news, Saudi Arabia kicks off meetings for its debut Eurobond which is expected to raise $10-$15 billion in three tranches. Despite weak oil prices and Saudi's political and economic risks, the issue should see huge demand.

The deal will also unleash a torrent of pent-up Gulf issuance, investors reckon.

"If Saudi issues $15 billion...this could add further pressure on the Qatari and UAE bond spreads," said Jerome Audran, EM credit analyst at UBS Wealth Management, noting a $7-$8 billion Kuwaiti bond was also expected.

"We expect some Saudi banks and Qatari banks to issue, which would obviously put further pressure on corporate and sovereign bonds in the region, especially for double or single-A rating names because people will likely switch from these bonds to the slightly higher yielding Saudi bonds."

For GRAPHIC on emerging market FX performance 2016, see http://link.reuters.com/jus35t

For GRAPHIC on MSCI emerging index performance 2016, see http://link.reuters.com/weh36s

For GRAPHIC on MSCI emerging Europe performance 2016, see http://link.reuters.com/jun28s

For GRAPHIC on MSCI frontier index performance 2016, see http://link.reuters.com/zyh97s

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see ) Emerging Markets Prices from Reuters Equities Latest Net Chg % Chg % Chg

on year Morgan Stanley (Xetra: 885836 - news) Emrg Mkt Indx 902.80 -2.77 -0.31 +13.68

Czech Rep 890.13 -4.44 -0.50 -6.92

Poland 1757.00 -0.04 +0.02 -5.49

Hungary 28436.31 -42.93 -0.15 +18.88

Romania 6932.68 +5.97 +0.09 -1.02

Greece 585.74 +0.44 +0.08 -7.22

Russia 1007.85 +2.37 +0.24 +33.13

South Africa 45418.55 +22.83 +0.05 -0.83

Turkey 77543.43 -100.16 -0.13 +8.11

China 3059.13 -6.12 -0.20 -13.56

India 28082.34 +21.20 +0.08 +7.52

Currencies Latest Prev Local Local

close currency currency

% change % change

in 2016

Czech Rep 27.02 27.00 -0.05 -0.07

Poland 4.28 4.28 +0.00 -0.50

Hungary 305.07 304.68 -0.13 +3.14

Romania 4.49 4.48 -0.23 +0.57

Serbia 122.92 122.99 +0.06 -1.18

Russia 62.57 62.65 +0.13 +16.59

Kazakhstan 330.97 330.50 -0.14 +2.88

Ukraine 25.80 25.77 -0.12 -7.16

South Africa 14.41 14.36 -0.34 +7.30

Kenya 101.20 101.20 +0.00 +0.99

Israel 3.81 3.80 -0.30 +1.93

Turkey 3.08 3.08 +0.05 -5.35

China 6.71 6.72 +0.08 -3.30

India 66.82 66.82 +0.00 -0.93

Brazil 3.20 3.19 -0.09 +23.82

Mexico 18.89 18.90 +0.07 -9.09

Debt Index Strip Spd Chg %Rtn Index

Sov'gn Debt EMBIG 353 -1 .01 7 67.10 1

All data taken from Reuters at 09:07 GMT.

Currency percent change calculated from the daily U.S.

close at 2130 GMT.

(Additional reporting by Adela Suliman)