* Emerging stocks at 3-week highs, China up 3 pct
* Emerging debt, FX firmer
* Ukraine politics worries investors
By Carolyn Cohn
LONDON, Oct 12 Emerging stocks hit three-week
highs for a second successive day on Wednesday and sovereign
debt spreads tightened, helped by a jump in Chinese stocks and a
more positive outlook on the euro zone debt crisis.
Markets have been in thrall to each step in the euro zone's
attempts to resolve its debt woes, and recent optimism has taken
riskier emerging assets higher.
Slovakia's parliament brought down the government on Tuesday
by rejecting a plan to expand the euro zone's rescue fund, but
the outgoing government said it hoped to pass the measure by the
end of the week with opposition support.
The next focus is the release of the European Union's bank
recapitalisation plan, due later on Wednesday.
Chinese shares got a large boost, taking the emerging equity
index higher, on talk of sovereign wealth fund support for the
The positive mood is also feeding into emerging European
"The market had positioned itself for much more emerging
market FX weakness on anticipation that real money accounts
would begin to unwind long currency bondholdings on the fear
factor," said Roderick Ngotho, CEEMEA FX strategist at RBS.
"Our expectation is that some of these hedges will come off.
That's a technical correction which has potential to have some
legs. All the currencies seem to be getting some upside."
The MSCI emerging equities index rose more than 1
percent to a three-week high and has staged a comeback of over
11 percent since Oct 4.
Chinese stocks jumped 3 percent from 2-1/2 year
lows, helped after Central Huijin, the domestic investment arm
of the country's sovereign wealth fund, upped its stakes in the
"Big Four" Chinese banks on Monday.
The Thomson Reuters emerging Europe index
gained 1.5 percent and emerging sovereign debt spreads
tightened by 12 basis points to 371 bps over U.S. Treasuries,
their narrowest since Sept 21.
Hungarian stocks rose almost 2 percent to their
highest in over a month, Russian stocks gained more than
3 percent to 12-day highs and Turkish stocks hit
Most emerging European currencies were also firmer, with the
rouble rising more than 1 percent to three-week highs
against the dollar as Brent crude futures hurdled $111 a
barrel, above the $108 level factored into Russia's 2008 budget.
The rand also gained more than 1 percent to two-week
In a reminder of the stark mood of the previous three
months, however, an HSBC index showed emerging economies grew at
their slowest pace in more than two years in the July-September
quarter, as manufacturing output turned negative after expanding
for nine straight quarters.
The Kenyan shilling snapped a two-day slide to record
lows as tea exporters sold large quantities of dollars. The
central bank also said it was in the repo market to mop up 10
billion shillings ($94.21 million).
African frontier currencies have been sliding on domestic
demand for dollars amid global risk aversion and rising food and
fuel prices, but the Nigerian naira was also being
supported on Wednesday by a 275 bp interest rate hike this week.
The cost of insuring Ukraine's debt in the five-year credit
default swap market was at elevated levels of 970 bps, close to
Feb 2010 highs, according to Markit.
The United States, Russia and the EU reacted sharply to the
Ukrainian court sentencing on Tuesday of former prime minister
Yulia Tymoshenko to seven years in prison for abuse of office in
relation to a 2009 gas deal with Russia that she brokered.
"We do not expect this to disbalance power in Ukraine by a
large margin," BNP Paribas analysts wrote in a client note.
"Nonetheless, the increased tensions do not bode well for
Ukraine in the short term in light of its existing shortfalls
with regards to the IMF programme."
Ukraine was due to receive about $6 billion from the IMF
this year to boost central bank reserves, but the Fund halted
disbursements after the government delayed unpopular reforms
such as raising household gas prices.
An IMF mission is due to visit Kiev later this month.