LONDON, March 15 (Reuters) - Emerging stocks struggled higher and currencies were mixed on Thursday amid mounting concerns over trade tensions and a worsening diplomatic row between Britain and Russia.
MSCI’s broader emerging market index climbed 0.1 percent higher, but the gains masked diverging performances across major bourses with Asian equities across export-oriented economies such as Taiwan and Malaysia suffering.
Concerns over possible trade wars came to the fore again after the administration of U.S. President Donald Trump pressed China to cut its trade surplus with the world’s largest economy by $100 billion.
Solid global trade in recent years has been a driver for sustained and broad-based economic growth, lifting many markets to record highs and with emerging markets have been some of the best performing assets in recent months.
“The main risk that could undermine this positive outlook for emerging markets is the potential for full-scale trade wars,” said Rabobank strategist Piotr Matys.
“That would definitely undermine prospects for the emerging markets. Another risk factor is the faster pace of tightening of the Fed.”
Market expect at least three hikes over the course of the year from the U.S. Federal Reserve, and rinsing U.S. interest rates will push up borrowing costs for emerging markets.
Meanwhile the premium demanded by investors to hold emerging market hard currency debt over safe-haven U.S. Treasuries has risen steadily over the week, adding 11 basis points and revisiting a near-four month high.
Rising diplomatic tension between London and Moscow after an attack with a nerve agent on British soil could also cast a shadow.
Prime Minister Theresa May pointed the finger firmly at Russian President Vladimir Putin as she outlined retaliatory measures in parliament on Wednesday. This was followed by more harsh condemnation from the U.S. at the United Nations while the European Union and NATO also backed Britain.
For the most part Russian markets seemed to shrug off the developments. Stocks gained and the rouble firmed against the dollar by 0.4 percent, though this followed three days of losses for the currency.
“The market seems to be aware that it’s going to be potentially difficult for the West to penalise Russia for allegedly trying to poison a former Russian spy,” said Rabobank’s Matys. “There are no signs of panic.”
But Russian dollar-bonds showed signs of pressure despite clawing back some of Wednesday’s losses. The average yield premium demanded by investors over U.S. Treasuries rose to as much as 173 basis points - its highest level in 2018.
Meanwhile, currencies suffered in Turkey and South Africa - two economies seen as sensitive to U.S. interest rate moves - despite the dollar treading water.
Turkey’s lira weakened 0.4 percent and hit a fresh 3-1/2 month trough.
“It’s mainly driven by domestic factors: persistently high inflation, widening current account deficit,” said Matys, adding some though the economy had overheated at a time when interest rates were not sufficiently high.
South Africa’s rand weakened 0.6 percent.
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