Emerging stocks touched 13-month highs yesterday as investors priced out the likelihood of a September US rate rise and stronger currencies raised expectations that some central banks could act to curb the gains.
Bets that the US Federal Reserve would raise rates this month were as good as wiped out after a recent tepid US payrolls report and data showing the weakest rate of service sector growth since the 2008 financial crisis.
“We think the Fed won’t hike at all this year.
Hence our bias for emerging markets remains positive,” HSBC strategist Murat Toprak said.
The resulting fall in the dollar and US yields benefited emerging assets across the board, with MSCI’s equity index half a per cent higher for its fourth straight day of gains.
Capital inflows boosted South Korea’s won and Taiwan’s dollar to their strongest levels against the dollar in over a year, though the won ceded some gains after officials warned of action in case of excessive currency moves.
Traders were also watching for possible action in Taiwan.
Yields on JPMorgan’s GBI-EM index of local debt slipped to the lowest in nearly three weeks at 6.17%.
Many expect further gains, given the possibility of interest rate cuts across the developing world.
Brazil signalled on Tuesday it may consider cutting rates thanks to inflation having eased in part due to the real’s 24% appreciation this year.
Indonesia also said it was “ready to ease” policy.
Malaysia held rates steady yesterday but dismal exports data raised expectations of a cut in coming months.
Toprak said however there were palpable signs of economic improvement in most emerging markets, citing robust Chinese manufacturing data, Turkey’s below-forecast inflation and the South African economy’s 3.3% growth in the second quarter.
While South Africa still risks a ratings downgrade to junk this year, Toprak said “the fact that we had stronger than expected economic growth means that the likelihood of a ratings downgrade has decreased somewhat — that’s positive for bonds and the currency.”
The rand was steady after rallying 3% on Tuesday against the dollar, while benchmark bonds extended gains, with yields at two-week lows.
South African credit default swaps also slipped to two-week lows according to Markit data.
In emerging Europe, the Polish zloty traded at one-week highs against the euro before a central bank meeting that is expected to leave rates unchanged at 1.5%.
The rouble approached two-week highs against the dollar and Russian stocks touched fresh record highs thanks to firmer oil.
Russian 10-year yields eased further to fresh 2-1/2-year lows of around 8.08%.
The central bank said inflation expectations fell sharply last month and is expected to cut rates by 50 basis points on September 16.