Emerging stocks nudged lower yesterday but were on track for the biggest weekly gains since mid-July while currencies were more mixed as the prospect of very gradual US interest rate rises continued to support assets from developing economies.
Emerging markets breathed a sigh of relief after the Federal Reserve on Wednesday maintained its low interest rate stance and projected a less aggressive rate rise trajectory in 2017 and 2018.
This fuelled expectations that ample liquidity was here to stay for now and investors would continue their hunt for yield.
While MSCI’s emerging markets benchmark snapped a four day winning streak to soften 0.25% on the day, the index was on track for a near 4% jump over the week and has soared nearly 16% since the start of the year.”
Emerging markets assets will get a bit more support from less tightening in the US,” said William Jackson, senior EM economist at Capital Economics, adding that he did not expect the steep gains made by emerging stock markets in July and August to be repeated.”There’s likely to be anticipation ahead of other Fed meetings.
That said, there are some more domestic reasons to think the rally might continue as some of the economic data from emerging markets has improved.”
Flow data reflected investors’ liking of emerging market bonds, with dedicated funds attracting inflows of $1.5bn in their 12th straight week of gains.
Emerging dollar-bond yield spreads — reflecting the premium investors demand to hold riskier debt over safe-haven US Treasuries — were at the tightest levels in two weeks after having come in by 18 basis points since last Friday.
Meanwhile more supply was coming to the market.
Russia’s $1.25bn dollar-denominated bond is starting to trade after Moscow compiled a bulging order book of $7.5bn for the issue, showing the country can readily tap global markets in spite of Western sanctions.
Currencies delivered a more mixed performance on the day.
Russia’s rouble weakened 0.2% against the dollar, dragged down by oil prices falling more than 1%, but the currency is still on track for solid gains on the week.
Turkey’s lira matched that fall as the country’s Industry Minister Faruk Ozlu predicted economic growth would be below expectations in the third quarter, reinforcing the government message that the economy has lost some momentum.
Yet South Africa’s rand, 0.4% stronger on the day, is headed for its best week against the dollar since early April, also underpinned by better-than-expected economic data.
Across central and eastern Europe, both currencies and stock markets suffered, with Polish assets chalking up the biggest losses.
The zloty slipped 0.3 % against the euro and stocks tumbled 1% after Prime Minister Beata Szydlo said she would announce a government reshuffle next week.