Emerging market sell-off spills over to Europe, U.S.

By Francesco Canepa

LONDON (Reuters) - A global flight from emerging market assets gathered pace on Friday, sending the Turkish lira to a record low and setting global shares on course for their worst week this year.

European shares fell, especially in firms exposed to emerging markets, and a sell-off on Wall Street was poised to extend into a second day as investors worried about the impact of slower growth in China, U.S. monetary policy and political problems in Turkey, Argentina and Ukraine.

The sell-off raised the prospect of a repeat of moves last June when developing country stocks fell almost 18 percent and hit global shares. This came after the U.S. Federal Reserve signaled its intention to scale back the bond-buying stimulus that had led investors to chase higher returns in emerging market assets.

"We expect the emerging market sell-off to get worse before it starts getting better," said Lorne Baring, managing director of B Capital Wealth Management in Geneva.

"There's definitely contagion spreading and it's crossing over from emerging to developed in terms of sentiment."

European shares tracked Asian stocks lower. Spain's IBEX (.IBEX) index, highly exposed to Latin America, lagged other regional bourses, falling nearly 3 percent (.IBEX).

The Turkish lira hit a new record low of 2.33 to the dollar, even after the central bank spent at least $2 billion trying to prop it up on Thursday.

Turkey's new dollar bond, sold only on Wednesday, fell below its launch price. The cost of insuring against a Turkish default rose to an 18-month high and Ukraine's debt insurance costs hit their highest since Kiev agreed a rescue deal with Russia in December.

Argentina decided to loosen strict foreign exchange controls a day after the peso suffered its steepest daily decline since the country's 2002 financial crisis.

In the last week, investors withdrew some $2.5 billion from emerging stocks. Investments in Latin American alone dropped by $398 million, or 1 percent, analysts said, citing EPFR data.

"I think you've got a bit further to go in terms of outflows from emerging markets," Mark Tinker, head of AXA Framlington Asia, said.

An MSCI index of emerging market shares was down 1.2 percent, taking its weekly loss to 4.7 percent, its steepest since early November. The MSCI all-country world equity index (.MIWD00000PUS) was down 0.5 percent, on course for a weekly loss of 0.8 percent, its worst since mid-December.

The dollar (.DXY) edged lower after losing 0.9 percent against a basket of major currencies, including the euro, yen, Swiss franc and sterling, on Thursday. That was its worst one-day performance in three months.

"When investors avoid risk, they buy currencies backed by a current account surplus," said Sho Aoyama, senior market analyst at Mizuho Securities in Tokyo.

WALL STREET

U.S. stock futures suggested a sell-off on Wall Street had further to go on Friday. March contracts on the S&P 500 were down 0.6 percent.

On Thursday, the Standard & Poor's 500 (.SPX) fell 0.9 percent and the Dow Jones industrial average (.DJI) 1.1 percent to record its third consecutive day of losses.

A flight to safety lifted currencies backed by a current account surplus, such as the Japanese yen and Swiss franc, and highly rated government bonds. German Bund futures rose and 10-year U.S. Treasury yields hit an eight-week low.

Gold traded close its highest in nine weeks and poised for a fifth straight weekly climb as weaker equities burnished its safe-haven appeal.

(Additional reporting by Toni Vorobyova, editing by Nigel Stephenson)