* Stocks stay at three-week lows after 1.6 pct fall
* Turkish stocks rise over 1 pct; lira up 0.5 pct
* zloty steadies vs dollar after 2.7 pct fall
By Sujata Rao
LONDON, April 19 (Reuters) - Emerging equities traded at
three-week lows on Tuesday, extending a 1.6 percent decline in
the previous session triggered by a downgrade of the U.S.
ratings outlook, but Turkish assets bounced back.
Mounting speculation that Greece will restructure its debt
and Standard & Poor's threat to cut the United States' triple-A
credit rating fuelled a frantic unwinding of carry trades during
the previous session, with investors dumping riskier assets in
favour of the yen <JPY=> and the dollar.
Markets steadied somewhat on Tuesday but sentiment remained
shaky, with investors also worrying about the outlook for China.
The MSCI emerging equities index <.MSCIEF> dipped 0.2 percent to
its lowest level since the end of March, extending losses into a
fourth straight session.
Emerging European markets, however, were trading on a more
optimistic note than their Asian peers with most bourses in the
region in positive territory.
"The market is taking a few steps back ... Yesterday's move
was a reflex action caused by all the bad news we still have on
the major economies. This volatile and nervous market situation
will last a while as there are so many problems still unsolved
in the developed world," said Arvid Bohm, emerging equity
strategist at SEB in Stockholm.
He noted that S&P's downgrade of its U.S. rating outlook to
negative on Monday had come during a week of relatively thin
liquidity ahead of Easter holidays in many markets and that had
exacerbated moves.
Emerging European stocks <.TRXFLDEEPU> rose 0.7 percent
thanks to 1 percent-plus gains in Moscow and Budapest. South
African and Turkish stocks also rose more than 1 percent after
falling heavily in the previous session.
But the broader index was hit by a 2 percent fall in Chinese
equities <> -- the biggest one-day loss in almost two
months -- while Korean and Taiwanese markets also fell.
CURRENCIES RECOVER
On currency markets, emerging European currencies stabilised
against the dollar and the euro after sliding sharply on Monday
in the wake of the S&P announcement.
The Hungarian forint and the Turkish lira lost around 2
percent versus the dollar on Monday while the Polish zloty fell
2.7 percent -- its biggest one-day loss against the greenback in
five months.
On Tuesday however the zloty rose 0.3 percent to the dollar
and 0.4 percent to the euro <EURPLN=>.
"Given the short-term nervousness, we recommend staying away
from the risky EM (emerging market) assets at present until the
global risk picture stabilizes," Societe Generale told clients,
noting that central European currencies, the lira, rand, Korean
won and Mexican peso -- all high-beta to the dollar -- were most
vulnerable.
But SG said currencies supported by tighter monetary
policies would gain in the medium term.
"We remain positive on the zloty, especially against a short
forint position," it said.
Hungary's central bank held interest rates steady on Monday,
despite higher-than-expected March inflation. Recent Polish data
has increased the possibility of a rate hike in May, although
recent comments from central bankers have dampened those
expectations.
Turkish markets staged a sharp rebound on Tuesday, with
stocks rising 1.15 percent <>, after dropping 2.7 percent
on Monday, in what local traders said was a technical correction
from oversold levels.
The lira jumped 0.5 percent against the dollar <TRY=> after
a 1.8 percent fall on Monday. Short-term bond yields dropped to
the lowest since mid-February though the 10-year yield was at a
one-month high on expectations Turkey's central bank would start
to raise interest rates from the third or fourth quarter.
SG analysts said they favoured the lira "in anticipation of
a tightening of monetary policy in Turkey."
Bohm of SEB said he remained underweight Turkish equities
noting that earnings growth was estimated at 3-5 percent this
year compared with 20 percent for emerging markets overall. The
Turkish bank association said on Monday they expected profits to
fall 20 percent because of stringent reserve requirement
increases.
"I'm not sure the market has fully discounted the negative
impact on banks' earnings from (quantitative tightening)," he
said. "We could even see negative earnings growth this year so
I'm hesitant to move back in fully."
On bond markets, yield spreads over U.S. Treasuries
tightened 5 basis points <11EMJ> <11EML>.
Nigerian and Ivory Coast bonds continued to rise, with
Nigerian paper benefiting from President Goodluck Jonathan's
victory in weekend elections, though the positive sentiment was
eroded by deadly riots in the opposition-dominated, majority
Muslim north.
(Editing by Susan Fenton)
