Reuters
London

The lira rose 0.5% against the dollar yesterday and stocks rallied to 10-day highs, buoyed by a sharp contraction in Turkey’s trade deficit, though most other emerging assets were broadly weaker.
Currencies and bonds tracked the uncertain mood in world equity markets, where downbeat US manufacturing data has stoked uncertainty about the world economy, following on earlier lacklustre Chinese numbers.
MSCI’s main emerging equity index pulled back a touch after rising 1% on Tuesday after the weak US numbers reinforced belief in a gradual rate rise cycle.
Chinese mainland shares rallied around 3% for their biggest one-day gain in a month on expectations of more government stimulus but Hong Kong-listed H-shares rose only 0.4% and other Asian bourses such as Seoul and Taipei retreated .
In Europe, Turkish stocks gained almost 1% while the currency firmed after the release of data showing November’s trade deficit had contracted by 52%.
It is benefiting from Western support too, with NATO planning to help strengthen Ankara’s air defences and the European Union pledging $3bn in aid and agreeing to speed up talks on Turkey’s accession to the bloc.
William Jackson at Capital Economics noted also that Russian sanctions imposed after Turkey’s downing of a warplane were softer than feared.
“We’ve seen a couple of months of relatively good current account data which shows some external vulnerabilities may be declining. Plus the promise to speed up EU accession talks has led to hopes the (ruling) AK Party will re-launch reforms which stalled a few years ago when accession talks hit a brick wall,” Jackson said.
Russian stocks rose 0.6% but the rouble weakened 0.2% in line with weaker oil prices. With the sanctions on Turkey, likely to boost food inflation, investors will watch the results of a rouble bond auction.
In Poland, the zloty stood just off recent five-week lows against the euro, with the central bank expected to keep interest rates on hold. The government meanwhile plans a 2016 fiscal deficit of 3.0-3.2% of GDP, a level that may trigger EU deficit penalties.
Jackson linked the zloty’s lacklustre performance to concerns about the populist policies of the Law and Justice party which took power in October and also won presidential elections in May.
“Law and Justice seems to be sticking to its election pledges...you can basically draw a straight line for the zloty from May until now,” he said referring to the currency’s roughly 8% weakening since then.
The Czech crown meanwhile continued to test its exchange rate cap versus the euro, the upward pressure likely intensifying with a smaller-than-expected budget deficit and the likelihood of more ECB stimulus.
But Credit Suisse economist Mikhail Liluashvili did not anticipate problems for the central bank. “They can emphasise they will back the (euro) floor where it is and are ready to buy unlimited amount of (euro), this should be enough’, he said.