Emerging market assets rose as concerns triggered by US mid-size lenders prompted investors to tone down their expectations of a big interest rate hike by the Federal Reserve next week.
The MSCI’s index for EM currencies rose 0.3 percent, while its gauge for stocks jumped 1.4 percent. Currencies were set to rise at the end of a roller coaster week, while stocks remained flat.
Rigorous monetary tightening cycles by developed world central banks, such as the US Fed and the European Central Bank, have hurt riskier emerging market plays. Their currencies which are weighed against the dollar or the euro, have not fared well in a high-rate environment supportive of gains in these developed market units.
But that stands to be tested as investors now start to price in a smaller 25 basis point rate hike by the Fed next week, in the aftermath of the collapse of two big US regional banks and recent stress signals from First Republic Bank.
A $30 billion lifeline for First Republic did ease fears of its imminent collapse and helped buoy risk sentiment.
South Africa’s rand strengthened 0.5 percent against the dollar, while Hungary’s forint and the Czech crown, both rose about 0.2 percent each against the euro.
Shares in China, the largest emerging market, closed up 0.5 percent. China’s central bank said it would cut the amount of cash that banks must hold as reserves for the first time this year to help keep liquidity ample and support a nascent economic recovery.
Shaun Murison, senior market analyst at IG Markets in Gauteng, South Africa says the short-term negative sentiment for emerging markets have ease, “and with that we’re seeing a bit of risk on trade and at least near-term hemorrhaging has seemed to stop.”
“I think there’s quite a high probability of a 25 basis point move now… and markets are still processing some further gains in emerging market currencies if we were to get maybe even a pause.”
South African stocks added 1.5 percent, while Turkish stocks gained 1 percent.
In Russia, all eyes are now on a central bank decision at 1030 GMT and Governor Elvira Nabiullina will shed more light on monetary policy and other issues at a media conference at 1200 GMT. — Reuters
