(There will be no London-based emerging market report on
Monday, May 26 due to a UK public holiday)
By Sujata Rao
LONDON May 23 Emerging equities headed for a
fourth straight week of gains on Friday, supported by optimism
over world growth though fears of election-related unrest in
Ukraine held the market near 6-1/2 month highs.
MSCI's emerging equity index was flat and is about
10 percent off levels it was at when a May 22 2013 speech by
ex-Federal Reserve boss Ben Bernanke set off a tidal wave of
selling by warning of a reduction in U.S. money-printing.
Hard currency emerging debt too is trading at yield spreads
of around 302 basis points over U.S. Treasuries compared
to around 288 bps at the time of Bernanke's speech. But some
assets such as the Indian rupee and stocks have surpassed
year-ago levels on renewed hope of structural reform.
Indian stocks rose 1 percent and are on track for
their best monthly performance since January 2012. The rupee is
trading just off 11-month highs at 58.4 per dollar.
Firmer recent Chinese data and clear signs of economic
recovery in Europe and the United States is helping sentiment
while U.S. bond yields have fallen from early-2014 levels.
"We believe we are in an environment where flows can drive
the price action higher. The real money in EM is already
entering overweight category, but the overweight is not extreme
yet," said Luis Costa, head of CEEMEA FX and debt at Citi.
Data from EPFR Global bore that out, with emerging stock
and bonds funds taking in $1.5 billion in the past week.
"If you look at returns over the last two months, that
could help sentiment. (But) we would be careful on some of the
currencies, some of the bond curves," Costa added.
Barclays analysts saw U.S. yields and policy mistakes within
emerging markets as possible risks.
"We think EM spreads will continue to tighten. However,
based on our view that U.S. Treasury rates will increase...in
the second half, we expect a relatively muted outlook for EM
credit returns for the remainder of the year," they said.
Local currency debt may have further to rally. Yields on the
GBI-EM index are around 6.8 percent versus 5.5 percent before
the tapering speech. Hungarian yields approached record lows
after the central bank signalled more rate cuts.
Turkish yields hit new six-month lows after the central bank
surprised markets on Thursday by easing policy.
Political risk is also a concern as Ukraine and Egypt gear
up for elections and Thailand suffered another military coup.
Russian stocks and the rouble pulled back from multi-month
highs ahead Sunday's election in Ukraine, where
violence has flared again in the turbulent eastern provinces.
Though the Kremlin has softened its stance, the West has
threatened harsh sanctions if Russia disrupts the election
"Investors are keen to close their long positions ahead of
the election in Ukraine," Geldy Soyunov, a senior analyst at
Alfa Bank in Moscow, said.
Earlier in Asia, Thai stocks came under heavy selling
pressure, falling to two-week lows a day after the army
chief seized control of the government in a coup.
And while Cairo markets were shut, the pound has plumbed
record lows on lack of foreign investment inflows.
Costa of Citi however reckons the expected election win for
Abdel Fattah al-Sisi will not immediately bring back investors.
"I do not think Sisi is likely to make changes on a massive
scale. Investors would prefer to go to Nigeria, East Africa,
Serbia before Egypt," he added.
For GRAPHIC on emerging market FX performance 2014, see link.reuters.com/jus35t
For GRAPHIC on MSCI emerging index performance 2014, see link.reuters.com/weh36s
For GRAPHIC on MSCI emerging Europe performance 2014, see link.reuters.com/jun28s
For GRAPHIC on MSCI frontier index performance 2014, see link.reuters.com/zyh97s
For CENTRAL EUROPE market report, see
For TURKISH market report, see
For RUSSIAN market report, see )
(Editing by Toby Chopra)