By Marc Jones
LONDON, Sept 14 : Emerging markets made a strong finish to the week, as shares enjoyed a third day of gains and Turkey’s lira headed for its second best week since 2009 after the central bank hiked rates decisively.
There were still plenty of troublespots. Argentina’s peso was pounded 3 percent overnight as worries about its finances returned and election nerves weakened the Brazilian real, but the overall mood seemed brighter.
China’s blue-chip stocks and much of Asia closed higher on the prospect of new Sino-U.S. trade talks and India’s rupee bounced off a record low as it emerged Prime Minister Narendra Modi would meet finance ministry officials to discuss the currency’s slump.
With the relief rally in Turkey still in full swing, attention turned to Russia and whether its central bank would also lift interest rates following a tumble in the rouble and sanctions worries.
A Reuters poll showed economists expect it to hold fire at 7.25 percent. But its recent rhetoric and rouble weakness could open the door for a rate hike.
Morgan Stanley said it saw a 70 percent probability of no move and a 30 percent chance of a hike.
“Given uncertainty about the strength of FX pass-through, inflation and the U.S. sanctions outlook, we expect the (central bank) to keep its hawkish tone, leaving its options for a hike open,” it said.
Guido Chamorro, co-head of U.S. dollar emerging debt for Pictet, said emerging markets were now having to hike rates to avoid their currencies been trampled as increasing numbers of developed economies begin to raise their borrowing costs.
“It has been a big week, Argentina is still an ongoing story,” he said. “One thing that it demonstrates is that emerging markets can not decouple from the developed world.” Indonesia’s rupiah, one of Asia’s worst performers this year, picked up marginally against the dollar at 14,825, after the country’s deputy central bank governor reiterated it too was ready to raise rates again.
MSCI’s 24-country emerging market stocks index also appeared to be trying to reconnect with developed markets as the likes of Wall Street continue to grind higher The EM benchmark was up for a third day running and for the third week in four.
Big falls in countries like China and the general impact of weaker currencies has pushed it down 20 percent since the end of January, wiping around $950 billion off its value in the process.
Financial flow data measuring weekly changes only until Wednesday, before the rally kicked in, showed outflows of $1.2 billion from EM stocks funds and the largest EM debt outflows in 11 weeks, at $1.6 billion.
“You don’t yet have synchronised inflation but now you have synchronised hawkishness from central banks,” Pictet’s Chamorro said.