EMERGING MARKETS-Stocks, currencies drop on new COVID-19 variant

Emerging market assets were firmly in the red on Friday, with South Africa's rand dropping 2%, as a possibly more dangerous COVID-19 variant was detected, forcing new travel restrictions. The variant that scientists say could be vaccine-resistant and more transmissible was detected in Botswana, Hong Kong and South Africa.

Emerging market assets were firmly in the red on Friday, with South Africa's rand dropping 2%, as a possibly more dangerous COVID-19 variant was detected, forcing new travel restrictions.

The variant that scientists say could be vaccine-resistant and more transmissible was detected in Botswana, Hong Kong and South Africa. The United Kingdom banned flights from South Africa and some neighboring countries, while Japan implemented tighter border controls.

South Africa's rand which has been on a downtrend in sympathy with Turkey's struggling currency and in reaction to dollar strength, hit an over one-year low. Including the day's moves, the currency has lost more than 5.5% in two weeks. Johannesburg-listed stocks lost 2% and were on course for their worst session in two months, while 10-year bonds hit 18-month lows.

MSCI's index of EM shares lost almost 2% and was heading for its worst session in more than three-months, with all major bourses in the red. Those in Hong Kong, Indonesia and Russia fell more than 2%, while Polish stocks sank 3%. The currencies index looked set to log its sharpest one-day loss in 2-1/2 months. Russia's rouble and Turkey's lira lost more than 1% against the dollar.

"Asian FX will remain under pressure into the weekend thanks to the virus nerves sweeping markets, as with EM in general," said Jeffrey Halley, senior market analyst, Asia Pacific at OANDA. Both the broader EM indices were on course for their worst week since August.

The rouble slid past 75 a dollar to seven-month lows, with a 3%-4% drop in oil prices further weighing on the currency. Germany on Thursday said the European Union must be prepared to sanction Russia in the event an incursion into Ukraine. Turkey's central bank on Thursday said it was committed to interest rate cuts, a policy that spurred a crash in the lira to all-time lows.

The currency crisis has yet to have a significant impact on Turkish banks and JPMorgan said there are no signs of funding stress in the banking system. Turkey's central bank governor said the banking sector was able to overcome market volatility. In diplomatic news, A Turkish court is set to hold the latest hearing in the trial of philanthropist businessman Osman Kavala on Friday, whose case provoked a tussle between Ankara and its Western allies after they called for his immediate release. For GRAPHIC on emerging market FX performance in 2021, see http://tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance in 2021, see https://tmsnrt.rs/2OusNdX

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