EMERGING MARKETS-EM stocks steady after Brazil, Trump turmoil

Fri May 19, 2017 9:41am GMT

By Claire Milhench

LONDON May 19 (Reuters) - Emerging equities steadied on Friday with offshore-listed Brazilian assets clawing back ground after posting hefty losses on Thursday, when political turmoil in Brazil and the United States prompted a broad-based sell off.

Brazilian assets plummeted on Thursday after allegations that President Michel Temer condoned bribes to silence a key witness in a corruption probe, deflating investor optimism about the prospects for his ambitious pension and labour reform agenda. Temer has refused to resign.

However, London-listed Brazil exchange traded funds rebounded on Friday, with the iShares MSCI Brazil up 1.5 percent, and HSBC's MSCI Brazil and DBX MSCI Brazil up 2 percent.

Brazilian stocks are down 9.7 percent so far for the week, after falling 8.7 percent on Thursday - their biggest one-day drop since the 2008 financial crisis. The real steadied on Friday after tumbling more than 7 percent against the dollar on Thursday, its biggest daily decline since 2002.

The average yield spread of Brazilian sovereign bonds over U.S. Treasuries on the JP Morgan EMBI Global Diversified was trading at 295 basis points (bps), after blowing out to 297 bps on Thursday - its widest since January.

"It is very worrisome for Brazil... this is a very serious thing," said Alejo Czerwonko, director of emerging markets investment strategy at UBS, though he added that the potential for contagion for other emerging markets was limited.

"Countries like Argentina, that are highly linked to Brazil are also being affected, but the EM rally will depend on different factors...We're talking about impeachment in the U.S. too."

The broader emerging markets complex has been clobbered by a ballooning political crisis in Washington this week, with reports that President Donald Trump tried to interfere with a federal investigation into his campaign's links with Russia.   Continued...

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