LONDON: Emerging stocks fell 3 per cent on Thursday with Russia leading the way, as the US government backed away from plans to buy toxic assets and commodity producing countries suffered from the ongoing fall in oil.

The Bush administration on Wednesday largely abandoned its original asset-buying plans and said it would focus its $700 billion financial bailout fund on making direct investments in financial institutions and shoring up consumer credit markets.

“There is little clarity over the US plan to salvage their financial system. It is being negatively perceived,” said Elisabeth Gruie, emerging markets strategist at BNP Paribas. “Going into the G20 meeting, it will be crucial that policymakers try to restore sentiment.

I think it will be a wait and see situation ahead of this meeting.” G20 leaders meet this weekend in Washington. Data showing China’s industrial output growth at a seven-year low highlighted the slowdown in the world’s largest emerging economy.

Benchmark emerging equities dropped 3 per cent to their lowest level this month and are down 58 per cent this year. Russia’s MICEX fell 9 per cent after resuming trade from a brief suspension earlier in the day.

The index was shut on Wednesday with investor nerves frayed after the central bank devalued the rouble by 1 percent earlier this week. “The central bank will ultimately have to engineer a roughly 10 per cent devaluation of the rouble against the basket by mid-2009,” Merrill Lynch analysts said in a client note, adding Russia faced “risk of severe capital outflows and a sharp decline in official foreign exchange reserves”.

Analysts say the frequent closure of Russia’s RTS and MICEX exchanges creates a headache for cash-strapped investors trying to sell Russian assets. Russian stocks have shed more than $1 trillion since Dmitry Medvedev became president in May.

Kuwait’s stock exchange will stop trading on its stock exchange until Nov 17 after a court order on Thursday, and the government launched a bail-out fund for investment firms. Investors had viewed the Gulf region as relatively unscathed by the financial crisis but falling oil has scuppered that view.

Emerging sovereign debt spreads edged out by 2 basis points to 655 bps over US Treasuries, bringing their widening to 63 bps in the past two days. Russia’s five-year credit default swaps, used to insure against restructuring or default of debt, widened to a mid-price of 800 bps from 760 on Wednesday, according to specialist CDS monitor CMA Datavision.

Central European currencies rallied on a firmer euro, with an offer from Japan of up to $100 billion to the International Monetary Fund for emerging economies seen providing a boost. The shekel hit its lowest level this year against the dollar after the Bank of Israel cut rates this week by half a point to a record low of 3 percent in an inter-meeting move.

The Icelandic crown weakened to 207 per euro in offshore trade on continued uncertainty about an IMF loan. The IMF said on Wednesday Iceland’s $2 billion loan programme would soon go to the board for approval but did not give a date. The Financial Times reported this week that the IMF was withholding its backing for the loan.

source: Economictimes

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