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Prospects Daily: Developing-country shares fall, U.K. inflation falls below 2% target for first time since 2009, Turkey’s central bank leaves benchmark interest rates unchanged in February

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 Financial Markets…Developing-country stocks fell on Tuesday, led by a drop in Chinese shares, while currency in Russia and Ukraine slid to a record low and five-year lows, respectively. The benchmark MSCI Emerging Market Index declined 0.4% as Chinese central bank’s decision to drain funds from its money markets triggered speculation the country will tighten monetary policy, pushing the Shanghai Composite stock index lower by 0.8%. The Russian ruble weakened to all-time low of 41.30 against the euro-dollar currency basket, extending its depreciation that began in mid-2013 on the back of heightened global risk aversion. Ukraine’s hryvnia slid 0.8% towards recent 5-year lows as its central bank eased capital controls on foreign-exchange market.

Italian government bonds advanced today, with the benchmark 10-year yields sliding to eight-year lows, amid signs of easing political tensions. The country’s 10-year bond yield fell 5 basis points (bps) to 3.56%, the lowest level since January 2006, while the 30-year yield tightened as much as 4 bps to 4.49%, the first time below 4.5% since March 2007. Spanish government bonds rose as well with its 10-year yield dropping to 3.52% after being as low as an 8-year low of 3.51% yesterday.

High Income Economies…U.S. homebuilders' confidence in the housing market has declined sharply as the severe weather battering much of the nation kept many would-be buyers at home. The National Association of Home Builders housing market index unexpectedly slipped from 56 in January to 46 in February, the lowest level since May 2013.

U.K. consumer price inflation eased to 1.9% (y/y) in January from 2.0% in December, falling below the 2% target for the first time since November 2009, giving room for the Bank of England to leave its record low interest rates unchanged for some more time and avoid any rate hike that risks economic recovery. On a three-monthly annualized basis, the CPI increased 1.1% (3m/3m saar) in January, following a 2.5% increase in December.

Amid concerns over the faltering recovery in emerging market economies and the subdued outlook for the U.S. recovery, Germany's investor confidence deteriorated for the second straight month in February, reversing the improving trend seen in recent months. The ZEW indicator of economic sentiment, which measures investors' views of the economy over the next six months, dropped to 55.7 in February from 61.7 in January. On the other hand, the indicator of experts' assessment of the current economic situation climbed to 50 in February from 41.2 in January, and hit the highest level since August 2011.

Developing Economies… East Asia and pacific: Foreign direct investment into China increased markedly in January, rising 16.1% (y/y) to US$10.76bn after posting a 3.3% (y/y) increase in December 2013. Driving this increase, investment in domestic services industry rose 57% in January, while investment in manufacturing declined by 21.7%. The largest increase in investment came from the U.S., which rose 34.9% in January, followed by 10 Asian economies (+22.2%); while FDI from the European Union plunged 41.3%.

Europe and Central Asia: At its meeting of February 18th 2014, Turkey’s central bank decided to leave its key interest rates unchanged, stating that the tight monetary policy stance will remain in place until the inflation outlook improves. The one-week repo rate was left unchanged at 10%, the overnight lending rate was kept at 12%, and the overnight borrowing rate was maintained at 8%. The central bank hiked its interest rates in an emergency meeting in January to stabilize the local currency, the lira, and contain inflationary pressures.

In contrast, Hungary’s central bank decided to cut the policy rate further, reducing it by 15 basis points to a record low 2.7%. The central bank has cut the policy rate steadily since August 2012; and, thus far, the policy rate has been reduced by a total of 430 basis points. The February decision was made against the backdrop of a weak local currency and subdued inflation.

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