| LONDON, March 18
LONDON, March 18 Russian stocks jumped 2 percent
and the rouble firmed up after President Vladimir Putin said on
Tuesday he did not want to see Ukraine divided any further, in
comments that also boosted other emerging assets.
The rouble, which had traded more than half a point weaker
against the dollar earlier in the day, reversed its losses and
approached the two-week highs hit on Monday, when Western
sanctions turned out to be less stringent than expected.
Moscow's defiant move to formally annex the Crimea region
keeps alive tensions with the West.
But fears that the Kremlin may seek to take control of other
areas of Ukraine eased after Putin said in a speech to
parliament that he did not want to see Ukraine divided further.
That sparked a rally on Russian equity markets, which rose to
Russia's 2043 dollar bond rose 3 points and its bond yield
premium to U.S. Treasuries tightened 11 basis points on
the EMBI Global index.
"The market is starting to price normalisation of the
situation in Ukraine," said Regis Chatellier, emerging markets
strategist at Societe Generale. "The probability that things
could get worse in eastern Ukraine is reducing."
That was also reflected in debt insurance costs, with
Russian five-year credit default swaps (CDS) falling 16 basis
points from Monday's close to 254 bps.
"What the market was expecting that tensions in eastern
Ukraine would be much more severe...Then you have Putin saying
we don't have the intention to split Ukraine. The reality is at
this point, sanctions will have a limited impact."
However the chance of more punitive sanctions in future are
likely to cap rouble gains. The jitters are also reflected in
offshore rouble forwards, which continue to trade at a rare
premium to onshore contracts on fears that future local
settlements could prove difficult.
Putin's comments fuelled gains in European equities too and
sapped the bid for safe-haven assets such as the yen and German
Bunds. Emerging equities rose 0.4 percent, extending
tentative gains from earlier in the day.
Equities across emerging markets had been lifted by big
gains in Indian and Korea earlier. Putin's speech also boosted
markets in eastern Europe, with Hungarian stocks rallying
almost 2 percent and Poland gaining half a percent.
In Ukraine however, assets weakened as it appeared Russia
was likely to get away with annexing a part of its territory.
The hryvnia fell 4 percent to the dollar and
Ukraine's CDS jumped 39 bps.
"What happens to hryvnia depends on whether the central bank
is intervening and given the level of their FX reserves I'd
expect that authorities would not stand in the way of the
currency," said RBS analyst Tatiana Orlova.
"On the basis of fundamentals, hryvnia should move to 11 or
12 per dollar."
While broader emerging markets have been boosted by better
economic data from many countries, including the so-called
Fragile Five, gains were seen capped by Chinese developments.
The yuan traded almost at one-year lows to the dollar
after the central bank's weekend move to widen its trading band,
indicating it was willing to tolerate more currency volatility.
Traders expect more weakness as the economy loses steam.
Turkish equities jumped almost 1 percent after
Putin's comments and an expected no-change decision by the
central bank. The lira pared its losses to trade 0.15 percent
lower versus the dollar after the bank affirmed it would
keep monetary policy tight after a round of whopping rate hikes
at the end of January.
Latin American markets were calm in early trading.
Brazil's real was little-changed, while Chile's peso
weakened slightly as traders sought out dollars to renew
currency forward contracts.
Yields on Brazilian interest rate futures ticked
higher as traders awaited a speech by central bank chief
Alexandre Tombini at a Senate hearing later in the afternoon.
For CENTRAL EUROPE market report, see
For TURKISH market report, see
For RUSSIAN market report, see )