Emerging stocks hit 3-year high; yuan slips 0.7%
11 Sep 2017 - 23:15
London: Emerging stocks pushed to a new three-year high yesterday after nuclear-armed North Korea held back on stoking tensions further at the weekend while China’s yuan slipped off 16 month peaks after measures to stem its recent strength.
A firmer dollar capped gains in emerging currencies but the overall mood was positive after North Korea marked the anniversary of its founding without resorting to any further missile or nuclear tests.
“These market reactions to North Korea are always going to be short-lived as long as we don’t have a move towards war and that seems unlikely still,” said Per Hammarlund (pictured), chief emerging market strategist at SEB. “Once the rhetoric is tempered, markets normally recover quickly.”
Assets across emerging markets have been on a roll in recent weeks, benefiting from weakened US rate rise expectations - subdued inflation data, combined with Congress’s decision to push debt ceiling talks back to December, have reduced the likelihood of a rate move this year.
MSCI’s emerging equity index rose 0.4 percent while emerging sovereign dollar bonds’ yield premia over US Treasuries fell to 292 basis points (bps), the lowest since August 2014.
JPMorgan’s emerging local currency bond index closed last week with a 5.93 percent yield, the lowest since January 2015 while the ELMI Plus index of emerging currencies likewise touched three-year highs on Friday.
Currency gains have been led by the yuan, which has gained 7 percent in 2017 and breached the key 6.5 per dollar level for the first time since May 2016.
But it slipped 0.7 percent yesterday after measures by authorities signalled discomfort with its recent strength.
China’s central bank said yesterday it had scrapped reserve requirements for financial institutions settling forward yuan positions and also stopped requiring foreign banks to put aside reserves for offshore yuan deposits in China.
JPMorgan analysts said recent yuan strength was due to the rebound in economic growth and improved interest rate differentials with the United States but estimated growth of 7 percent-plus would be needed to sustain further currency gains.
“Our expectation is that some of the supports for yuan that have been apparent in 2017 will gradually dissipate over time. We remain comfortable with a modest depreciation trend returning for yuan over the medium term,” they told clients.
The Turkish lira firmed 0.3 percent against the dollar to nine-month highs and Turkish stocks rallied 1.1 percent after second quarter data showed the economy grew by 5.1 percent year-on-year, just below a forecast of 5.3 percent in a Reuters poll.
Turkey’s finance minister said tourism revenue growth and higher exports would help growth accelerate in the third quarter.
Russia’s rouble firmed 0.3 percent, stocks rose half a percent and local bond yields held off three-month lows hit last week as expectations grew of a 25-50 bps rate cut this Friday.
Ukraine this week holds roadshows for its first dollar bond since its 2015 debt restructuring, eyeing a benchmark-sized 10 to 15 year issue.