Emerging stocks extended gains to ten-day highs yesterday, taking their cue from firmer world equities and a weaker dollar while Nigeria’s naira fell for the second day after being freed from its dollar peg.
Britain’s June 23 vote on European Union membership has been dominating investor attention but receding Brexit fears, along with a dollar index approaching two-week lows, have re-ignited appetite for equities and emerging markets.
Gains will likely be capped however before US Federal Reserve chief Janet Yellen’s two-day Congressional testimony starting later on Tuesday along with some anxiety about China’s economy that saw local shares close in the red.
MSCI’s emerging equity index rose half a per cent, up for the third straight day, and emerging currencies were mostly firmer against the dollar.”
We expect markets to remain relatively volatile in the run-up to the referendum...although I imagine once that is done, the attention will go back to the Fed and China,” said William Jackson at Capital Economics.
Nigerian markets were settling into the new currency regime, with the naira extending losses after Monday’s 30% plunge against the dollar. The naira opened 1.4% weaker at 286 to the dollar, with $2mn traded But it traded firmer in the six-, nine and 12-month non-deliverable forward market (NDFs) though short-dated contracts weakened further..Jackson saw fair value for the naira around 300 per dollar versus current levels near 286.
He said the fact the central bank had moved straight to a float rather than a two-tiered exchange rate system was positive.”We should reach some equilibrium quickly — within weeks I’d say,” he added.
Nigerian dollar bond yield spreads over Treasuries stood at one-month lows. Nigerian stocks rose 0.7%, recovering some of Monday’s 1.6% fall caused by volatility from the naira.
Currencies and stock markets in emerging Europe were flat to firmer a day after regional assets received a boost from ebbing Brexit fears.
Focus was on Hungary and Turkey where central banks are due to announce interest rate decisions.
Hungary is seen keeping rates unchanged while Turkey could cut its overnight lending rate by 50 basis points.
The lira firmed to a one-week high versus the weaker dollar before the decision, as did 10-year bonds.
Analysts said recent lira stability and data showing slower inflation would encourage a rate cut by the central bank which remains under constant government pressure to loosen policy.”
As usual the move will be presented by the (central bank) as being a further step on the road towards monetary policy simplification.
However, any cut should be regarded as easing pure and simple,” TD Securities wrote, adding they expected no lira reaction to a 50 bps cut.
However Russian stocks and the rouble faltered, with the former falling almost 1% as oil prices fell for the first time in three days.