January 28, 2014 / 8:42 PM / 4 years ago

EMERGING MARKETS-Currencies, stocks gain as Turkey seen raising rates

By Natsuko Waki and Walter Brandimarte
    LONDON/RIO DE JANEIRO, Jan 28 (Reuters) - Turkey's lira
gained for a second straight day on Tuesday on bets of a steep
interest rate hike, while other emerging market currencies and
stocks rose on growing expectations that more developing
countries would tighten monetary or fiscal policy.
    Hopes for strong policy action in leading developing nations
brought relief to an emerging markets rout that gained traction
last week as investors, fearing less U.S. stimulus and weaker
Chinese growth, worried about a currency meltdown in Argentina.
    A sudden stampede of investors out of emerging markets could
hurt the economic prospects of developing countries, with
potential spillover into developed nations just as the U.S.
Federal Reserve prepares to cut back on monetary stimulus.
    "There seems to be a concerted tightening trend underway in
the more fragile emerging market countries brought about by the
strong sell-off reality check," strategists with Brown Brothers
Harriman said in a research note. 
    "The question is, will this be enough to stop the bleeding?
We think it will help, but it is probably not enough."
    After hitting a 4-1/2 month low on Monday, the MSCI emerging
equity index rose 0.4 percent. The Latin American
portion of the index also climbed 0.4 percent.
    Still, demand for protection against volatility in
exchange-traded funds that invest in emerging markets was on the
rise on the Chicago Board Options Exchange, with a key
volatility index jumping over 44 percent since the
beginning of last week.
    The lira gained about 1 percent to 2.256 per
dollar after briefly touching a record low of 2.39 on Monday, as
investors bet Turkey's central bank will lift its benchmark
interest rate by 225 basis points to 10 percent at the end of an
emergency meeting later on Tuesday. 
    An aggressive rate hike would mark Turkey's return to more
orthodox monetary policies after unsuccessful attempts to
support the currency with forex auctions, liquidity adjustments
and verbal intervention. It would also likely put the central
bank at odds with Prime Minister Tayyip Erdogan, who has
publicly condemned rate increases. 
    India's rupee rose about 1 percent after its
central bank unexpectedly raised its benchmark interest rate by
25 basis points to counter inflation. 
    
    BRAZILIAN REAL STRUGGLES
    Brazil's real closed little changed at 2.4256 per
dollar after losing more than 3 percent of its value over the
past seven sessions as traders bet that rate hikes in Turkey and
India would ease the pressure on emerging markets in general. 
    Bolstering bets on additional interest rate hikes in Brazil,
central bank chief Alexandre Tombini said in an interview with
the Financial Times that the bank "would certainly adjust policy
again if need be." 
    Brazil has already raised its benchmark Selic rate by 325
basis points to 10.5 percent since last April and policymakers
are running out of room to raise borrowing costs much higher
without badly damaging an already sluggish economy.
    Brazil's central bank has also tried to smooth out the
real's weakening trend with daily sales of currency swaps
, derivatives that provide investors with protection
against currency losses.
    But fears that President Dilma Rousseff would balk at
reining in public spending in an election year have weighed on
the real, which shed 13 percent of its value in 2013. 
    In an attempt to differentiate Brazil from other fragile
emerging economies, Finance Minister Guido Mantega said the
government will soon announce budget cuts to ensure the
country's "fiscal soundness." 
    Mexico's peso rose 0.9 percent in a second straight
session of gains as policymakers tried to set the country apart
from weaker emerging markets by saying growth-enhancing reforms
will soon bear fruit.    
    In Argentina, however, the peso continued to slide on the
black market, dropping 2.4 percent to 12.45 per dollar.
That is a steep discount over the official exchange rate
, which remained around 8.0 per dollar for a third day
as the central bank sold about $60 million to control the
exchange rate, according to traders.
    Argentina's official peso rate tumbled over 10 percent last
Thursday in its worst single-day loss since the country's 2002
debt default and financial crisis.
    "We don't think that the current stability can last for too
long," wrote Dirk Willer, emerging markets strategist with Citi,
regarding the peso's official exchange rate. "But it will
probably not matter too much for global markets outside of the
Brazilian real." 
    The Russian rouble edged 0.2 percent lower as Economy
Minister Alexei Ulyukayev said the government could delay plans
to move to a floating exchange rate and instead consider limits
on the currency, which has already lost 5 percent so far this
year. 
    
    MORE MONETARY TIGHTENING?
    South Africa and Indonesia - which with Brazil, India, and
Turkey have been dubbed the "Fragile Five" economies because of
their heavy dependence on foreign capital - may follow with
interest rate hikes, analysts said.
    In the case of South Africa, however, a rate hike is not the
most likely outcome when the central bank meets later this week,
economists said. Still, the rand was up 0.3 percent at 11.03 per
dollar, off a five-year low hit on Monday.
    New cash injections from China's central bank and a deal
from a trust firm that averted a possible default for a
wealth-management product also helped stabilize China, to which
many emerging economies are geared.
    "The 'managed default' successfully staves off a potentially
disruptive default during the Chinese New Year period and the
hope is that it limits any systemic ripple effects," Deutsche
Bank said in a note to clients.
    In the long term, however, investors are concerned about the
effects of China's economic slowdown and the Federal Reserve's
plan to scale back its monetary stimulus. The Fed is expected to
announce a further $10 billion cut in its bond buying when its
two-day meeting concludes on Wednesday.

        
    Key Latin American stock indexes and currencies at 1930 GMT
    
 Stock indexes                  daily %   YTD %
                       Latest   change    change
 MSCI LatAm         2,912.87    0.37      -9.33
                                          
                                          
 Brazil Bovespa     47,840.93   0.29      -7.12
                                          
 Mexico IPC         40,757.37   -0.26     -4.61
                                          
 Chile IPSA         3,491.58    -0.83     -5.61
                                          
 Chile IGPA         17,372.26   -0.69     -4.69
                                          
 Argentina MerVal   5,638.92    0.59      4.60
                                          
 Colombia IGBC      12,003.02   -0.29     -8.17
                                          
 Peru IGRA          15,667.35   -0.75     -0.55
                                          
 Venezuela IBC      2,817.01    -0.16     2.94
                                          
                                          
 Currencies                     daily %   YTD %
                                change    change
                    Latest                
 Brazil real        2.4256      -0.07     -2.84
                                          
 Mexico peso        13.2500     0.88      -1.66
                                          
 Chile peso         545.7000    0.88      -3.59
                                          
 Colombia peso      2002.5000   0.31      -3.52
                                          
 Peru sol           2.8220      0.00      -1.03
                                          
 Argentina peso     8.0000      0.06      -18.84

 Argentina peso     12.4500     -2.41     -19.68

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