Emerging stocks, currencies to end week on cheery note

Rand weaker.
Image: Bloomberg

Emerging market currencies and stocks looked to finish a roller-coaster week on an upbeat note on Friday thanks to a subdued dollar, while surging oil prices gave a fillip to the Russian rouble.

MSCI’s index of emerging market stocks rose 1% on the day and was set for a weekly gain of 2.6% – the biggest in five months. The region’s equities on Friday took heart from an after-market rally in U.S. stocks sparked by strong Amazon.com Inc earnings.

Data analysed by BofA showed emerging markets equity funds attracted $2.2 billion of capital flows in the week to Wednesday, a seventh straight week of inflows.

Developing currencies were on course to end the week around 0.5% higher, riding on broad dollar weakness. The greenback has weakened about 2% this week, its biggest decline since March 2020, marking a sharp reversal from the previous week when traders rejigged positions to prepare for faster rate hikes by the Federal Reserve.

The rouble enjoyed the biggest gains, up more than 0.5% on the day and set to gain 2.6% for the week – its biggest weekly gain since the Covid market rout in March 2020 – as oil prices gain for the seventh consecutive week.

Geopolitical developments were very much in the focus as President Vladimir Putin was set to meet Chinese leader Xi Jinping later in the day at the opening of the Beijing Winter Olympics.

Tensions between Russia and the West over Ukraine have in recent weeks cast a pall on the outlook for global growth.

“Most central banks globally are already facing the conundrum of tightening monetary policy enough to dampen inflation but not so much to materially hurt growth or asset markets,” Andrea Cicione, a strategist at TS Lombard, said in a note.

“If Russia-Ukraine conflict were to occur the conundrum would only get worse as the outlook for growth deteriorates, inflation pressures rise, and risk assets suffer,” Cicione said.

The South African rand and Turkey’s lira were treading water, and the latter was set to end the week 0.8% lower on risks of further interest rate cuts at a time its annual inflation stands at a near two-decade high.

Meanwhile, a Reuters poll of market strategists noted that emerging market currencies from countries where central banks have already begun raising rates will outperform the rest.

Emerging market currencies in Central Europe slipped against the euro, with Poland’s zloty and the Czech crown down 0.2% and 0.3%, respectively, while Hungary’s forint was flat.

The Czech National Bank lifted its main interest rate to a 20-year high on Thursday to cool surging inflation, the fourth consecutive above-standard hike, but said any more tightening would likely be mild.

“Risks have now become skewed to the downside and we see a possibility that the CNB has delivered not only its last big hike but also its last one,” Morgan Stanley’s Alina Slyusarchuk said in a note to clients.

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