Emerging Stocks Drop on Iraq as Micex Slides on Failed Gas Talks

Emerging-market stocks fell for a fourth day, the longest losing streak since January, as violence escalated in Iraq and Russia cut off natural gas supplies to Ukraine after demanding fuel payments be made in advance.

The WIG30 Index retreated the most this month in Warsaw and the zloty depreciated 0.6 percent versus the euro after leaked recordings of a conversation between central bank Governor Marek Belka and a minister cast doubts over Belka’s future. OAO Gazprom declined as the company sued its Ukrainian counterpart. Iraqi bond yields jumped to an eight-week high. The Ibovespa fell for a second day as economists cut their Brazil growth forecasts. Thailand’s benchmark entered a bull market.

The MSCI Emerging Markets Index decreased 0.3 percent to 1,045.57. Iraq’s army killed more than 270 rebels yesterday, as sectarian strife pushed OPEC’s second-largest oil producer closer to civil war. Tension in Ukraine worsened after 49 servicemen were killed when pro-Russia fighters shot down a plane.

“We’re seeing some risk off in general today due to the Iraq situation,” Michael Wang, an emerging-markets strategist in London at Amiya Capital LLP, said by e-mail. “We’re seeing that especially in markets which are vulnerable to the rise in oil prices such as India and Turkey.”

A Bloomberg gauge tracking 20 emerging-market currencies fell for a second day, declining 0.3 percent to 92.2174. India’s rupee lost 0.7 percent against the dollar as a measure of wholesale-price inflation quickened at the fastest pace in five months. The Turkish lira depreciated 1.1 percent.

The premium investors demand to own developing-nation debt over U.S. Treasuries increased four basis points to 267 basis points, according to JPMorgan Chase & Co. indexes.

Iraq Turmoil

Eight out of 10 industry groups in the MSCI Emerging Markets Index fell, led by industrial companies. Brent crude climbed, extending its premium over West Texas Intermediate to the highest this month, as the crisis in Iraq showed no signs of abating.

The yield on Iraq’s $2.7 billion of bonds maturing in January 2028 climbed 25 basis points to 7.18 percent, the highest since April 21. In Turkey, which shares a border with Iraq, the Borsa Istanbul 100 Index declined 1.7 percent.

Iraq’s military pummeled the positions of Sunni Muslim insurgents who have captured large chunks of territory north of Baghdad, trying to turn back battlefield advances that threaten to split apart the country. Prime Minister Nouri al-Maliki’s Shiite Muslim-led government is seeking to reassert control over territory held by the breakaway al-Qaeda group.

Zloty Weakens

The Ibovespa declined 0.3 percent in Sao Paulo. Real estate developer BR Properties SA was the worst performer, dropping 2.8 percent. Economists covering Brazil cut their 2014 median growth forecast to 1.24 percent from 1.44 percent a week earlier, according to a central bank survey published today.

Dubai’s stock index slid 3.1 percent, while gauges in Abu Dhabi, Egypt and Qatar lost at least 1 percent.

“The violence in Iraq is a factor behind the weakness we are seeing in emerging markets,” said Rico Gomez, vice president of Manila-based Rizal Commercial Banking Corp., which manages about $1.8 billion. “Rising oil prices can push up inflation. Whenever there is a threat of breakdown in a key nation, expect markets to be affected.”

The zloty fell to 4.1435 per euro. The WIG30 declined 0.7 percent. Yesterday, Belka said he “regrets” language he used during a secretly taped 2013 conversation with Interior Minister Bartlomiej Sienkiewicz, published by the Wprost magazine two days ago. On the leaked tape, Sienkiewicz is heard asking Belka whether the central bank would be able to help the government support the economy before next year’s election if weak growth and budget inflows coincide with a surge in support for opposition Law and Justice party.

Ukraine Violence

Gazprom lost 0.8 percent in Moscow. The yield on its bonds maturing in July 2022 increased 13 basis points to 5.28 percent. The Russian state-controlled natural-gas producer said it hadn’t received any debt payments from Ukraine before a deadline expired at 10 a.m. Moscow time. From today, Ukraine will receive only gas paid for upfront, the company said in a statement.

Fighting in the eastern and southern parts of Ukraine escalated with insurgents shooting down a transport plane. Russia’s central bank, which has raised borrowing costs twice in 2014, left its main interest rate unchanged. The ruble weakened 0.7 percent versus the dollar.

MSCI’s developing-nation gauge has risen 4.3 percent this year and trades at 10.9 times projected 12-month earnings, data compiled by Bloomberg show. The MSCI World Index has increased 4 percent and is valued at a multiple of 15.1.

Energy producers in Asia gained on higher oil. PetroChina Co. climbed 1 percent in Hong Kong to the highest since November 20. Thailand’s PTT Exploration & Production Pcl jumped to the highest level since December. The SET Index climbed 1.1 percent to 1,471.85, rallying more than 20 percent from a Jan. 3 low.

To contact the reporters on this story: Natasha Doff in London at ndoff@bloomberg.net; Ian Sayson in Manila at isayson@bloomberg.net

To contact the editors responsible for this story: Michael Patterson at mpatterson10@bloomberg.net; Daliah Merzaban at dmerzaban@bloomberg.net Daliah Merzaban, Richard Richtmyer

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