By Sujata Rao
LONDON (Reuters) - Emerging stocks, bonds and currencies took another hammering on Wednesday as mounting expectations of Western action against Syria pushed up oil prices and drove investors to seek shelter in dollar assets.
The United States and its allies appeared to be gearing up for a military strike against Syria, perhaps within days, as punishment for last week's chemical weapons attacks which they have blamed on President Bashar al-Assad's government.
The Turkish lira and the Indian rupee - already under heavy pressure due to their large current account deficits and an imminent rollback in U.S. money printing - were at the forefront of selling, with both hitting new record lows as oil prices surged to six-month highs above $117 a barrel.
The higher cost of oil will make it even more difficult for the two energy importers to contain their current account gaps.
"Syria is raising the level of uncertainty and those closest to Syria such as Turkey will be on the receiving end of the selling," said Ashok Shah, CIO of asset manager London & Capital. "It's another round of bad news."
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"In (energy-importing) countries such as India, if you look at the oil price in rupees you can see how they are getting impacted - it's a double whammy for them."
As geopolitical tensions rose, the U.S. currency was investors' asset of choice, even at the expense of traditional safe havens the yen and the Swiss franc.
As the Middle East prepared for the impact of a strike on Syria, stock markets in the region plunged and the Israeli shekel extended losses, easing to a near three-month versus the dollar.
One of the best-performing emerging currencies this year, the shekel has shed almost half its 2013 gains on concerns that U.S.-led action in Syria may lead to wider conflict in the area.
The rupee fell as much as 3.7 percent at one point to 68.75 per dollar, bringing year-to-date losses to almost 20 percent. The lira fell 0.8 percent after breaching 2 per dollar on Tuesday for the first time, while Turkish credit default swaps inched up to new 14-month peaks.
Analysts at SEB advised clients to sell the lira against the rouble, the currency of oil-exporting Russia.
"While we still think dollar-rouble will trade higher towards year-end on the back of broad dollar strength, short-term concern over a limited strike on Syria will see oil-related trades dominate," they said.
The rouble has fallen 0.7 percent this week versus the dollar, far less than most emerging currencies. Against the dollar-euro basket, however, the rouble is near four-year lows.
The Syrian crisis has aggravated a selloff in emerging market assets that was triggered by expectations the U.S. Federal Reserve will start scaling back its massive stimulus programme, as soon as next month.
U.S. stimulus had helped flood developing economies with cheap liquidity and concerns those inflows could now reverse are preventing policymakers in many emerging economies from easing monetary policy to shore up slowing economic growth.
Brazil was expected to raise interest rates later on Wednesday for the fourth straight time, by at least 50 basis points, to try and stem a massive outflow of capital that has dragged the real to near five-year lows.
OUTFLOWS
Losses on emerging currencies come as investors stampede to exit emerging stocks and bonds, raising concerns of a vicious circle that will induce more and more investors to sell out.
Dubai's <.DFMGI> stockmarket dived 7.5 percent at one point, after a 7 percent slide on Tuesday, although it later recovered.
Stocks in the Philippines <.PSI> tumbled as much as 6 percent, while Indonesian and Thai bourses fell 2.5-3 percent <.JKSE> <.SETI> as Asian currencies suffered fierce selling, with the Indonesian rupiah touching a new four-year low.
Foreign investors sold $1 billion of Indian shares in the eight sessions through Tuesday while dumping almost $3 billion in debt over 13 successive sessions. Indonesia has seen equity outflows of $1.3 billion in the past seven sessions.
"Some emerging markets were overbought and they needed a selloff to bring them to more reasonable levels," said Julian Mayo a portfolio manager at Charlemagne Capital. "But at the moment, sentiment seems to have taken over from fundamentals."
Investors wanted to see stable currencies before buying again and were watching for central bank action, he said. The lira's recent weakness for instance is blamed on the central bank's refusal to significantly raise interest rates.
Central European currencies have been mostly resilient to the emerging markets malaise, thanks to a recovering euro zone and smaller funding gaps than many of their peers.
But they lost ground on Wednesday following dovish signals from policymakers. The Polish zloty fell 0.6 percent to five-week lows after the finance minister called for more rate cuts.
The Hungarian forint lost half a percent, adding to the previous session's 1 percent fall after a 20 bps rate cut.
"Such policy steps look increasingly inappropriate in a market where investors require higher risk premiums," analysts at BNP Paribas said.
(For GRAPHIC on MSCI emerging index performance 2013, see https://bsmedia.business-standard.comlink.reuters.com/weh36s (Editing by Susan Fenton)