Reuters
Emerging stocks rose to three-week highs yesterday, buoyed by gains in China and expectations of a dovish US Fed stance though the positive mood did not touch Russia where the rouble hit another record low.
The Zambian kwacha was the other loser of the day, falling more than 2% after the death of President Michael Sata though it later pared losses on hopes that elections would bring in a more investor-friendly leader.
The day’s main event is the Federal Reserve meeting that should see the bank end its bond-buying programme although markets appear convinced it will also signal interest rate rises are a long way off. That, along with robust US earnings, are keeping emerging markets sentiment relatively positive.
Chinese and Hong Kong shares closed 1.5% higher while most Asian indexes including India, South Korea and Taiwan jumped between 0.6 to 1.8%.
Russian rouble-denominated shares rose to two-week highs though currency weakness weighed on the dollar-denominated local index, keeping it flat. The rouble continued to shrug off central bank interventions, slumping 0.7% versus the dollar, with some analysts attributing the relentless weakening to expectations that a currency free-float may be announced at tomorrow’s central bank meeting.
Forwards markets are pricing the rouble to trade some 4-5% weaker to the dollar in six months’ time. Others reckon the bank will favour aggressive rate rises.
“In terms of a free float ... I think they will prefer to do it at a time when depreciation pressure is not so intense. If they do it now it risks fanning more depreciation,” Barclays Capital strategist Koon Chow said.
“Too fast a depreciation is associated with banking system instability and will encourage people to flee the banking system,” Chow said, predicting a 50 basis point hike tomorrow, followed by more tightening in coming months.
Citi analyst Luis Costa suggested a strong above-consensus rate hike of well over 50-75 bps could stabilise the market, by bringing foreigners back to local bonds, though he was sceptical of political backing for an aggressive hiking cycle.
“My reaction function is: consensus hikes = sell rouble, sell (bonds). No hike = brace for a deep selloff in Russian assets. Aggressive hike, more than 100 bps = dollar-rouble retracement,” Costa advised clients in a note.
The Turkish and South African currencies inched to seven-week highs .
The kwacha traded 0.6% down after opening 2% weaker on news of the president’s death. Zambia’s 10-year eurobond fell half a point but outperformed the bonds of oil exporters Angola and Gabon.