GLOBAL MARKETS-Asia enjoys relief rally as Turkey takes bold step

Wed Jan 29, 2014 1:38am EST

* Asian stocks, currencies rebound as Turkey lifts rates sharply

* Aggressive action stirs hopes of stabilisation in emerging markets

* Safe-haven assets dip, while commodity currencies regain ground

* Optimism will face test as Fed is expected to trim bond buys

By Wayne Cole

SYDNEY, Jan 29 (Reuters) - Asian markets rallied on Wednesday after Turkey stunned investors with a huge hike in interest rates, stirring hopes drastic action would short-circuit a vicious cycle of selling in emerging markets and revive risk appetite.

European shares were expected to ride the wave of optimism, with financial spreadbetters predicting Britain's FTSE 100 to open 43-48 points higher, or up by as much as 0.7 percent; Germany's DAX was seen opening 86-96 points higher, or up by around 1 percent; and France's CAC 40 seen up by 36-39 points, or up by around 0.9 percent.

"The major bourses are facing some solid gains at the open, with the momentum from Asian trade set to continue," IG market strategist Stan Shamu said in a note to clients.

Later in the session, the improved mood will face an test from the U.S. Federal Reserve, which is widely expected to trim its asset buying program by another $10 billion a month at the conclusion of its two-day policy meeting.

But the relief was enough to lift Japan's Nikkei 2.7 percent and S&P 500 e-mini futures 0.5 percent, while traditional safe havens such as the yen, bonds and gold all eased.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 1.2 percent after three sessions of falls.

Turkey followed India by tightening policy at a midnight meeting of its central bank, with a huge hike of 425 basis points taking the overnight lending rate all the way to 12 percent.

"Desperate times call for desperate measures, this is a confidence-saving measure," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.

"It will definitely hurt but it might be enough to stem the bleeding. It looks like the lira acted positively, whether it lasts is anyone's question."

Early signs were that it might be enough to stem the rout in the Turkish lira, which surged by the most in five years to reach 2.1650 per dollar from Monday's historic low of 2.39. Turnover was exceptionally strong in Asia, where the currency is rarely traded.

More emerging market central banks are expected to take steps to quell a mix of inflationary pressures at home and a flight of capital abroad. South Africa's central bank also holds its policy meeting later on Wednesday.

FED STILL AHEAD

Just the prospect of action had helped stabilise stock markets across the globe after several days of hectic selling. The MSCI emerging equity index climbed 1.1 percent from a 4-1/2 month low.

On Wall Street, the Dow ended Tuesday with gains of 0.57 percent, while the S&P 500 rose 0.61 percent.

The calmer tone was reflected in the market's favoured measure of volatility, the VIX index, which dropped over 9.0 percent on Tuesday to 15.80 and off a peak of 18.99.

Currencies leveraged to commodity prices and global economic growth benefited from the better mood. Also helping was surprising strength in industrial production in South Korea - an antidote to recent softness in Chinese data.

The Australian dollar rose more than a third of a U.S. cent to $0.8825 in the wake of the news from Turkey. The Aussie is often used as a proxy for hedging against stress in less liquid emerging markets.

Currencies from Malaysia to Indonesia and India all gained, while the South Korean won boasted its biggest daily rise in four months.

Going the other way, the safe-haven yen gave up some of its recent gains as the dollar advanced about 0.4 percent on the day to 103.31 yen from a seven-week trough of 101.71 touched at the start of the week.

Emerging markets could still be vulnerable to whatever the Fed decides on policy. The reduction of U.S. stimulus, combined with the resulting higher bond yields, is one reason funds have been switching money back to the developed world.

Yet many investors seem to have made peace with a steady pullback in asset-buying, given it is balanced with a commitment to keeping rates near zero for a long time to come.

Benchmark 10-year Treasury yields, for instance, have steadied around 2.78 percent, compared to a peak of 3.04 percent at the start of the month.

In commodity markets, gold lapsed to $1,253.50 an ounce to be well off Monday's high of $1,278.01.

Oil markets were awaiting inventory data from the U.S. Energy Information Administration (EIA), due later in the day, to gauge the country's demand.

U.S. crude edged back 11 cents to $97.30, having hit its highest so far this year on expectations that supplies were dwindling. Brent crude added six cents to $107.47.

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