Bloomberg News

Emerging Stocks Fall to Seven-Week Low After Hungary Cut to Junk

November 27, 2011

Nov. 25 (Bloomberg) -- Emerging-market stocks fell to a seven-week low after Moody’s Investors Service downgraded Hungary’s debt to junk status and a European Union official said the European debt crisis is spreading to core countries.

The MSCI Emerging Markets Index slid 1.2 percent to 877.40 at 4:50 p.m. in New York, the lowest close since Oct. 6. Hungary’s BUX Index slumped 3.1 percent, and yields on benchmark bonds jumped the most since 2009. The Bovespa fell 0.7 percent, reversing earlier gains, and Chile’s benchmark declined 1.5 percent. Czech equities dropped 1.1 percent. South Africa’s All Share index fell 0.2 percent.

The cost of insuring Hungary’s debt jumped to a record after the downgrade, which followed Prime Minister Viktor Orban asking the International Monetary Fund for assistance, while insisting he doesn’t want conditions attached to any new credit line. Default swaps for European sovereign bonds also hit a record as European Union Economic and Monetary Affairs Commissioner Olli Rehn said it looks like contagion is spreading to core countries that use the common currency.

“The rating downgrade of Hungary brings increased worries into the region of a spillover coming from Western Europe,” Simon Quijano-Evans, London-based head of emerging market research at ING Groep NV, said in a phone interview. “Rehn is stating the obvious and just highlighting the need for more accelerated action on the policymaking front. The markets are looking for more action from the euro zone officials.”

Funds investing in developing-nation stocks withdrew $2.7 billion in the week ended Nov. 23, Citigroup Inc. analysts led by Markus Rosgen wrote in a report today, citing EPFR Global data. South Korea had the most outflows in the Asia-excluding- Japan region during the week, according to the report.

Developing Nations

MSCI’s developing-nation index has dropped 24 percent this year, compared with the 14 percent decline in the MSCI World Index of developed countries. The emerging-market gauge trades at 9.6 times estimated earnings, less than 11.2 times for the MSCI World, according to data compiled by Bloomberg.

European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo urged euro-area politicians to take bold steps toward fiscal union to end the debt crisis, and said they shouldn’t rely on the ECB.

Germany, Finland and the Netherlands suggested the International Monetary Fund get more involved in fighting Europe’s debt crisis, the German Finance Ministry said in a statement in Berlin today.

Reuters reported Greece is demanding that new bonds issued to investors as part of a debt swap have a net present value of 25 percent, lower than the “high 40s the banks have in mind.” Greece’s 10-year bond traded at about 24.3 percent of face value as of today’s close.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments climbed three basis points to an all-time high of 381.16.

Hungary Ratings

Hungary’s foreign- and local-currency bond ratings were cut one step to Ba1, the highest junk-level score, from Baa3, Moody’s said in a statement late yesterday, assigning a negative outlook.

The yield on benchmark five-year bonds advanced 89 basis points, or 0.89 percentage point, to 9.78 percent at 12:33 p.m. in Budapest.

Emerging-market currencies weakened. The Czech koruna and Poland’s zloty dropped 2 percent. Colombia’s peso depreciated 1.2 percent and the South African rand declined 0.8 percent.

The Bovespa index fell for a fourth week as raw material producers declined on renewed concern that Europe’s debt crisis may trigger a global recession, outweighing a rally by consumer stocks.

Vale SA, the world’s largest iron-ore producer, retreated 2.1 percent. Hypermarcas SA, the maker of more than 190 consumer products, advanced 3.3 percent on bets its weighting on the Bovespa will increase. Gafisa SA, Brazil’s third-biggest homebuilder by revenue, rose 0.6 percent.

South Africa, Russia

In South Africa, Sasol Ltd., the biggest producer of gasoline from coal, declined 2.4 percent.

The Micex Index rose 1.3 percent in Moscow, reversing earlier losses.

The extra yield investors demand to own emerging-market debt over U.S. Treasuries declined five basis points, or 0.05 percentage points, to 437, according to JPMorgan Chase & Co.’s EMBI Global Index.

The Markit iTraxx SovX CEEMEA Index of eastern European, Middle East and Africa credit-default swaps rose 12 basis points, or 0.12 percentage point, to 388.90, according to data provider CMA.

--Editors: Glenn J. Kalinoski, Richard Richtmyer

To contact the reporters on this story: Ksenia Galouchko in New York at kgalouchko1@bloomberg.net; Stephen Gunnion in Johannesburg at sgunnion@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net


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