Emerging FX-Tumble on equity volatility, rate hike fears
By Sabyasachi Mitra
LONDON, June 13 (Reuters) - Emerging market assets sold off sharply on Tuesday as investors slashed their exposure to high yielding assets after a plunge in Japanese stocks sparked fears of rising equity volatility and global economic slowdown.
European stocks sank to their lowest in more than six months in early trade, tracking a 4 percent slide in Japanese shares and an overnight fall on Wall Street, as interest rate and growth concerns gnawed at investor sentiment.
The MSCI emerging market stock index <.MSCIEF> fell 3.6 percent to 670.16, while spreads on the benchmark JPMorgan Emerging Market Bond Index Plus <11EMJ> widened by 5 basis points to 229 over Treasuries. Global inflation worries have led central banks in Europe, India, South Korea, Turkey and South Africa to tighten their monetary belts.
A rise in interest rates in developed markets reduces the lure of high yielding, risky emerging market assets and in the current climate is helping to push investors toward a flight-to-safety strategy.
"Risk aversion has gone up especially on the back of sharply rising equity volatility," said Tania Kostos, currency strategist at RBC Capital Markets.
By 0940 GMT, the Turkish lira <TRY=> had lost nearly 2.4 percent versus the dollar at 1.60.
Central European currencies fell to multi-month lows, with the Polish zloty and the Hungarian forint piercing key levels on the back of domestic economic worries and a fresh emerging markets sell-off.
The Polish zloty hit a seven-month low, weakening beyond 4 to the euro <EURPLN=>, dragged down by weak domestic stocks.
Kostos said the zloty was strongly correlated to domestic stocks <.WIG20>, which in turn were hit by sharp falls in global copper prices.
Shares of Polish metals maker KGHM (KGHM.WA: Quote, Profile, Research), one of the world's top producers of copper and silver, were down nearly 6 percent on the day.
Analysts said U.S. consumer inflation data, due for release on Wednesday, will shape the trajectory of the Federal Reserve's monetary policy.
With other top Fed officials also expressing concerns about inflation, the central bank is expected to boost interest rates for a 17th straight time to 5.25 percent this month from the current 5 percent.
U.S. producer prices are also in focus on Tuesday. The PPI is expected to be up 0.4 percent in May compared to a 0.9 percent rise in the previous month. Excluding volatile food and energy the index is expected to post a 0.2 percent rise.
"The risks this week are asymmetrical and could lead to a rebound in emerging market currencies. Softer inflation figures out of the U.S. could lead to a massive unwinding of risk premiums on global inflation," said Kostos.
grazie 
