EM stocks surge to one-month high

Emerging stocks rose yesterday to one-month highs and were set for a second straight week of gains amid receding expectations for a June US rate rise, while South African assets were steady before a crucial ratings review.Politics and sluggish economic growth are dogging emerging markets, with the latest data showing Chinese services cooling to three-month lows, raising expectations that Beijing will seek to weaken the yuan.The yuan touched five-year lows this week and has fallen for five weeks in a row.South Africa faces its credit rating being cut to junk by S&P Global later in the day.However the rand rose 0.2% and bond yields touched two-week lows, benefiting from a weaker dollar and a perception that the downgrade is mostly priced in.The dollar has pulled off two-month highs, with the US Federal Reserve now not expected to raise rates this month, although jobs data later on Friday could change that view.TD Securities analyst Cristian Maggio said that even if S&P held fire on Friday, South Africa would likely fall to junk by year-end.”It seems very unlikely South Africa can retain its rating - investment grade status is no longer consistent with the South Africa dynamic.” He added: “This is the lull before the storm...The market is in wait-and-see mode, but it is ready like a fully loaded spring to react to whatever the (ratings) decision.” ING Bank noted that South Africa’s 5-year credit default swaps are already 50 basis points (bps) wider than those of Russia, which has a lower BB+ rating. The CDS were steady at 306 bps, according to Markit.But ING’s analysts added: “Given the soft back-drop for industrial metals, we prefer to be rand sellers and see dollar/rand pushing to the 16.25/30 area again over coming weeks.” South African stocks rose half a per cent, slightly outgunning 0.4% gains on MSCI’s emerging index while earlier, Hong Kong and mainland Chinese shares rose by a similar amount.Russian shares rose 1% in line with oil, which rose above $50 a barrel, while the rouble firmed 0.2%.Turkish bond yields meanwhile slipped slightly as data showed a bigger-than-expected inflation drop while the lira was flat to the dollar.The data raises expectations that the central bank will be able to cut rates at its next meeting.However, the new finance minister’s call for the central bank to support growth is likely to fuel fresh anxiety about monetary policy at a time when President Tayyip Erdogan is tightening his grip on power.In Eastern Europe, Hungary’s forint was near a one-month high against the euro, having benefited from the European Central Bank’s assurance on Wednesday of continued stimulus.On the political front, Poland has received a formal European Union warning over the rule of law while plans to convert Swiss franc loans at the expense of banks has put the Warsaw bourse on track for its biggest weekly fall since January.But the index rebounded 1% yesterday, thanks to 11% gains for Echo Investments, which announced a dividend increase.Polish 10-year yields are however at 3-1/2 month highs and look set for the biggest weekly rise since January.