Emerging-Market Stocks Drop, Erasing 2010 Gains, on European Debt Concerns

Emerging-market stocks fell the most in three months, erasing this year’s gains, on concern Europe’s government debt crisis is worsening and may derail the global economic recovery.

PT International Nickel Indonesia sank 6.2 percent, and Russian oil producer OAO Rosneft lost 2.5 percent as commodity prices slipped to a three-month low and crude fell below $80 a barrel. Equity gauges in Russia, Poland, Romania, Kazakhstan, and the Czech Republic slumped more than 1 percent, while Brazil’s Bovespa gained 0.1 percent. Poland’s zloty weakened to the lowest in two months, and its borrowing costs rose for the first time in 2010 at an auction of two-year bonds.

The MSCI Emerging Markets Index sank 2.1 percent to 970.24 by 5 p.m. in New York. More than $1.1 trillion was wiped from the value of global stocks yesterday on growing expectations Greece’s 110 billion-euro ($143 billion) rescue package will need to be repeated in Spain and Portugal.

“Investors are avoiding riskier assets,” said Andrew Freris, senior investment strategist for Asia at BNP Paribas Wealth Management. “The key concern there is an unspoken fear of fiscal deficits in some of these bigger countries, where we’re not talking about defaults of sovereign debt but serious dislocations resulting in further increases in interest rates.”

The extra yield investors demand to own emerging-market debt over U.S. Treasuries widened 11 basis points to 2.91 percentage points, the highest since Feb. 26, according to JPMorgan Chase & Co.’s EMBI Global Index. The so-called yield spread on bonds of Russia swelled 16 basis points, according to JPMorgan.

Demand Slumps

The yield on Poland’s bond due October 2012 rose to an average 4.802 percent, from 4.54 percent at the previous sale on April 7, as investors bid for 5.05 billion zloty ($1.6 billion) of the bonds, the weakest demand for that maturity bond since the auction on July 1, according to government data.

European Central Bank council member Axel Weber said today there is a threat of “grave contagion effects” in the euro area, and German Chancellor Angela Merkel said Europe is “at a crossroads.”

“The problems of Greece and the eurozone peripheral countries may mean weaker European growth,” said Imran Ahmad, an emerging-market strategist at Royal Bank of Scotland Group Plc in London. “With the bulk of exports in east European countries going there, the impact will be felt.”

Poland’s zloty weakened for a fourth day, sliding 1.7 percent to 4.0711 per euro, its weakest close since Feb. 8. Romania’s leu depreciated 1 percent to 4.1851 per euro, headed for its largest retreat since Oct. 1.

Commodities Repolantreat

Commodity producers declined after the Reuters/Jefferies CRB Index of 19 raw materials fell 1.3 percent, extending yesterday’s 2.3 percent slide. Crude in New York dropped 3.4 percent to $79.97 a barrel, after losing 4 percent yesterday.

Nickel Indonesia sank 6.2 percent, while KGHM Polska Miedz SA, Poland’s sole copper producer, slid 4.1 percent. OAO Rosneft, Russia’s biggest oil company, slipped 2.5 percent. Petroleo Brasileiro SA, Brazil’s state-controlled oil producer, slipped 0.8 percent.

The Jakarta Composite index tumbled 3.8 percent to close at 2,846.24, the steepest drop since Dec. 12, 2008. The gauge sank on concern fiscal policies in Southeast Asia’s biggest economy will be at risk after Finance Minister Sri Mulyani Indrawati submitted her resignation today as she was named managing director at the World Bank. PT Bank Mandiri, the nation’s biggest bank by assets, fell 7 percent.

The Philippine Stock Index tumbled 3.5 percent as faulty vote-counting machines raised concern there will be a delay in choosing a new leader to replace President Gloria Arroyo. South Korea and Thailand were closed for holidays.

China’s Shanghai Composite Index fell to a seven-month low before rebounding to gain 0.8 percent at the close, as investors speculated recent declines were overdone. Guangzhou Pharmaceutical Co., a producer of Chinese patent medicine, jumped 4 percent after China International Capital Corp. recommended investors “stay defensive” by holding health-care stocks.

--Chua Kong Ho in Shanghai. With assistance from Tal Barak Harif in New York, Rajhkumar K Shaaw in Mumbai, Krystof Chamonikolas in Prague, Piotr Skolimowski in Warsaw and Linus Chua in Singapore. Editors: Stephen Kirkland, Alan Mirabella.

To contact the reporter on this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net

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