By Jamie McGeever
LONDON (Reuters) - Emerging market shares and currencies slumped on Friday as investors feared higher U.S. interest rates under incoming President Donald Trump will spark capital outflows, while European bond yields were on course for their biggest weekly rise in a year.
Developed market equities held their ground. Europe's index of 300 leading shares was unchanged on the day, putting it on course for its best week since July, and Japan's Nikkei rose slightly, even in the face of a stronger yen.
U.S. futures pointed to a slightly lower open on Wall Street (ESc1), as investors prepared to take some chips off the table after the Dow Jones hit a record high on Thursday (DJI). The Dow remains well on track for its best week in five years.
The most volatile trading on Friday was across emerging markets, as investors bet that Trump's fiscal policies will be inflationary, push U.S. rates up and drive investors into dollar-based assets.
This prompted the central banks of Malaysia and Indonesia to intervene in the foreign exchange market to try to stem the outflow of money.
"The reflation trade started to shake those most sensitive to higher yields," said Jim Reid, market strategist at Deutsche Bank (DE:DBKGn).
"EM (emerging markets) is clearly also impacted by the anti-globalization side of the Trump victory. Indeed the moves over the last two days have been pretty eye watering," he said.
MSCI's emerging market (MSCIEF) index fell 2.3 percent to its lowest level since July, chalking up its third consecutive weekly decline, while MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) fell 1.6 percent.
Japan's Nikkei (N225) bucked the trend, closing 0.2 percent higher after earlier hitting a 6-1/2-month high.
Europe's FTSEurofirst 300 was up 0.1 percent and Germany's DAX (GDAXI) was up 0.4 percent, while Britain's FTSE 100 (FTSE) bore the brunt of a rise in sterling above $1.26
Among the biggest fallers in Asia were Indonesian shares, which slumped 3 percent (JKSE) while the rupiah currency
The Malaysian ringgit
FED REACTION FUNCTION
It's been a bruising week for the peso. It has fallen almost 10 percent - its worst week since 2008 and second worst since the 1995 "Tequila" crisis - as investors have taken fright at what a Trump presidency will mean for the Mexican economy.
Elsewhere in currencies, the dollar edged down from near three and a half month high against the yen to 106.50 yen
Still, the dollar is having its best week in a year, up 1.7 percent against a basket of currencies (DXY), lifted by the rise in U.S. yields and expectations of tighter policy from the Federal Reserve next year and beyond.
U.S. bond markets are closed for Veteran's Day on Friday. But already this week the 10-year Treasury yield has hit its highest levels in 10 months at 2.15 percent (US10YT=RR), and the 30-year yield a 10-month high of 2.96 percent (US30YT=RR).
The 30-year yield rose 38 basis points this week, its biggest weekly jump since 2009. Markets are betting that Trump's policy stance - from protectionism and fiscal expansion - will boost inflation.
Inflation expectations measured by U.S. inflation-linked bonds
"Sharply higher bond yields are often associated with higher implied inflation expectations, and the Fed might feel the need to respond to this with rate hikes, not delay," said Steve Barrow, head of G10 strategy at Standard Bank in London.
In a remarkable shift of sentiment, the market is also now starting to price in a chance of a rate hike by the European Central Bank for the first time since 2011.
Debt yields are rising in Europe as well, with 10-year German Bunds yield hitting a nine-month high of 0.345 percent
Italian government bond yields rose to their highest level in over a year on Friday ahead of a key ratings review and a planned sale of Italian government bonds via auctions. The country's benchmark 10-year bond yield rose as much as 9 basis points to 1.92 percent (IT10YT=RR).
Investors are also concerned that Prime Minister Matteo Renzi may resign if he loses the Dec 4 referendum on constitutional reform he pushed for.
Elsewhere, oil prices eased as the market looked to whether OPEC will decide later this month to cut production to address long-running over supply concerns.
U.S. crude futures (CLc1) fell 0.6 percent to $44.37 per barrel and Brent fell 0.3 percent to $45.70 (LCOc1).