By Chris Vellacott
LONDON, July 11 Fri Jul 11, 2014 5:54am EDT
LONDON, July 11 (Reuters) - Emerging European stocks recovered on Friday after losses caused by reports of debt problems at Portuguese bank Espirito Santo, though steep falls in Asia kept broader emerging equities at one-week lows.
Worries about a new round of financial fallout from Europe had rippled across the world in the previous session, triggering losses on Wall Street and countering the buoyancy in emerging assets that had been prompted by a bet that U.S. interest rates would not rise any time soon.
But Portuguese stocks recovered on Friday and helped lift sentiment across Europe, with MSCI's emerging European index up half a percent after slumping to three-week lows in the previous session. Stocks in Poland, Turkey and Hungary rallied by 0.5-1.0 percent while Russia was up 0.3 percent
.
Citi strategist Ishitaa Sharma said that after the initial knee-jerk selling there was more comfort that problems at Banco Espirito Santo were unlikely to trigger a Europe-wide banking crisis.
The catalyst for a significant emerging markets correction would be a hawkish U.S. Federal Reserve, Sharma said, predicting the current low-interest rate environment would keep investors chasing carry - the higher yields available in emerging markets.
"We need a more consistent rebound in U.S data before we see an aggressive repricing of EM risk ... It's very expensive to be long dollar versus emerging markets and bleed negative carry," she added.
But despite the recovery in Europe, MSCI's emerging equity index was 0.4 percent lower, having reached 13-month highs earlier in the week as big Asian markets fell in reaction to the previous session's Wall Street losses.
The index looks set to snap a two-week streak of gains.
In Asia, political developments continued to dominate.
Indonesia's rupiah was up 2.5 percent over the week, its largest weekly gain since mid-February, expectations of an election win by Joko "Jokowi" Widodo, seen as more business-friendly than his rival, ex-general Prabowo Subianto.
But uncertainty about the final result held the rupiah back on Friday, pushing it down against the dollar.
Indian stocks and the rupee also fell on profit taking following a scintillating run that saw the equity market hit successive record highs on reform hopes .
In Russia, the rouble weakened, down 0.3 percent against both the dollar and the euro partly attributed to data showing the economy only marginally skirted a technical recession in the first half.
Economic sluggishness was exacerbated by Western sanctions imposed on Russia over its role in the Ukraine crisis.
Stock market gains were capped by a 10 percent drop in the shares of debt-ridden Russian mining company Mechel, adding to a more than 8 percent drop in the previous session after the government said the company may be allowed to declare bankruptcy to sort out its finances.
The shares of Hungary's biggest bank, OTP were flat after early losses, though they have fallen almost 20 percent from a peak on June 2.
A law passed by Hungary's parliament and government plans to convert foreign currency loans later this year have triggered a string of profit warnings from banks that operate in the country.
Hungarian CDS rose to 166 basis points from 160 basis points on Friday, according to Markit, the highest level since early June.
Turkey's lira bucked fears of fallout from Portugal by data showing the country's current account deficit was narrower than feared - $3.43 billion in May, compared with $4 billion predicted in a Reuters poll.
Turkey's trading gap is considered its economic weak point.
"All in all, these are healthy numbers ... We are on track to hit our full year current account deficit forecast of 5.5 percent of GDP. But this will still be one of the largest external deficits in emerging markets," Deutsche Bank chief economist Robert Burgess said in a research note on Friday.
For GRAPHIC on emerging market FX performance 2014, see link.reuters.com/jus35t
For GRAPHIC on MSCI emerging index performance 2014, see link.reuters.com/weh36s
For GRAPHIC on MSCI emerging Europe performance 2014, see link.reuters.com/jun28s
For GRAPHIC on MSCI frontier index performance 2014, see link.reuters.com/zyh97s
For CENTRAL EUROPE market report, see
For TURKISH market report, see
For RUSSIAN market report, see ) (Additional reporting by Sujata Rao; Editing by Robin Pomeroy)
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