Emerging stocks hit a one-week high yesterday after strong US economic data, though bets on a December rate rise by the Federal Reserve brought many currencies under pressure.
MSCI’s emerging benchmark rose 0.3%, following developed bourses higher and lifted by gains across Asia, Turkey and parts of central and eastern Europe. The rise follows a recent batch of upbeat data from the world’s largest economy, the latest on Wednesday showing US services sector activity soaring to an 11-month high thanks to broad-based improvement across the index, helping the case for the Fed to raise interest rates.
More key numbers are coming on Friday, when U.S non-farm payrolls data is expected to show gains of 175,000 jobs, according to a Reuters poll.
A robustly growing US economy is generally seen as a positive for emerging markets even if it leads the Fed to raise interest rates. “The data has been quite strong yesterday, but also in recent days more generally. Payrolls is one thing that may introduce some thrill at the end of trading this week,” said Cristian Maggio, head of emerging markets strategy at TD Securities. Maggio predicted a Fed move in December would have only a temporary negative impact on emerging markets.”If they hike, it is sort of a dovish hike – they will step up a bit the process of normalising the interest rates, but we expect them to signal that this will be an extremely gradual hiking cycle,” he said.
However, with the dollar index up nearly 1% this week, emerging currencies felt the pressure.
South Africa’s rand weakened by 0.3% against the greenback, while Israel’s shekel matched that fall. Russia’s rouble traded flat in line with oil prices while Turkey’s lira followed suit.
Across central and eastern Europe, Hungary’s forint slipped 0.2% against the euro after hitting a 15-month high earlier.
Hungary’s economic and credit rating improvement is enticing more investors, and some local market players said investors may test authorities’ tolerance for a stronger forint.
Concerns that the European Central Bank could taper its stimulus has sent a chill through regional assets, with bonds selling off, especially in Poland, where five- and 10-year yields are near three-month highs Yet a Reuters poll showed investors were upbeat about Hungarian assets further ahead, expecting forint-denominated government bonds to outperform Polish peers.