EMERGING MARKETS-Emerging Stocks Jump, Led By Upgraded Hungary

Emerging Stocks Jump, Led By Upgraded HungaryEmerging stocks rose 1.3 percent on Monday and currencies firmed on a bet the U.S. Federal Reserve will not raise interest rates this week, with Hungarian assets driven higher by a ratings promotion to investment grade.

MSCI’s index hit one-week highs, shrugging off Friday’s rise in U.S. yields and tracking gains on developed bourses and in oil prices. Markets price in just a 12 percent chance of a rate rise at the two-day Fed meeting concluding on Wednesday.

However, there are concerns the Bank of Japan will prove less aggressive in its commitment to further monetary stimulus at its meeting, also on Tuesday and Wednesday.

“The environment is and will remain supportive for emerging assets,” HSBC strategist Murat Toprak said.

Aside from the Fed, Toprak cited stabilisation in commodity prices and better economic data from China.

“From time to time the market gets worried about an earlier move from the Fed so it has an impact but we have to trade through the noise,” he added.

Emerging sovereign dollar bond spreads have reacted however to the recent rise in 10-year Treasury yields, with average yield spreads at the widest in a month at around 347 basis points (bps). The index was unchanged on Monday.

A quarter percent pullback in the dollar index from two-week highs lifted emerging currencies, with some Asian ones rebounding as their markets re-opened after holidays at the end of last week. The rand firmed almost 1 percent to 10-day highs.

In emerging Europe, the Hungarian forint touched a six-month highs to the euro and yields fell between five and 12 bps across the curve, reacting to S&P Global’s announcement late on Friday it was raising Hungary’s credit rating to BBB-, the lowest investment grade rung.

The promotion makes Hungary, whose central bank meets on Tuesday, eligible for inflows from funds that can only invest in investment grade-rated countries.

Hungarian stocks, already among the best performing this year in emerging markets, jumped 1.8 percent to nine-year highs . With Hungarian 10-year bonds offering a 3 percent yield versus zero in Germany, analysts said the upgrade may pose a dilemma for authorities if inflows spur forint appreciation.

“Given the central bank is against a strong currency, we may hear verbal intervention from officials should a wave of capital outflows fuel forint gains against the euro,” Rabobank analysts wrote.

Interest rates are expected to be held steady at Tuesday’s monetary policy meeting in Budapest, but the central bank may cut the maximum amount that banks can hold in three-month deposits further to 1 trillion forints as part of efforts to stimulate lending and growth, a Reuters poll predicted.

Russian assets benefited from oil price gains and S&P’s decision to raise the outlook on its credit rating to stable. The rouble also derived support from the central bank’s hawkish tone on Friday when it cut rates by half a percent but warned that no more easing was likely this year.

Russian 10-year yields rose above 8.2 percent after the hawkish message and on Monday stood well above recent 2-1/2-year highs at around 7.92 percent. The rouble firmed 0.4 percent.

Renaissance Capital analyst Oleg Kouzmin praised the bank for clarifying its commitment to a 4 percent end-2017 inflation target.

“For real-money investors buying the disinflation story, this is a good thing,” he said. “It’s additional confirmation the central bank has become one of the most credible stories in emerging markets.”

Emerging Markets Prices from Reuters
Equities Latest Net Chg % Chg % Chg

on year

Morgan Stanley Emrg Mkt Indx 897.31 +11.86 +1.34 +12.99

Czech Rep 860.03 -0.78 -0.09 -10.07

Poland 1753.24 +18.98 +1.09 -5.70

Hungary 28583.85 +486.19 +1.73 +19.49

Romania 6975.02 -4.13 -0.06 -0.42

Greece 562.63 +3.13 +0.56 -10.88

Russia 964.58 +3.17 +0.33 +27.41

South Africa 45437.73 +7.35 +0.02 -0.79

Turkey 76993.50 +973.21 +1.28 +7.34

China 3026.61 +23.77 +0.79 -14.48

India 28674.28 +75.25 +0.26 +9.79

Currencies Latest Prev Local Local

close currency currency

% change % change
in 2016

Czech Rep 27.01 27.01 +0.01 -0.04

Poland 4.30 4.31 +0.11 -1.08

Hungary 307.70 307.80 +0.03 +2.26

Romania 4.44 4.45 +0.07 +1.70

Serbia 123.00 123.08 +0.07 -1.24

Russia 64.85 65.14 +0.45 +12.49

Kazakhstan 339.40 339.80 +0.12 +0.32

Ukraine 25.73 25.80 +0.27 -6.91

South Africa 14.08 14.17 +0.66 +9.84

Kenya 101.20 101.20 +0.00 +0.99

Israel 3.77 3.77 -0.08 +3.06

Turkey 2.97 2.98 +0.17 -1.95

China 6.67 6.67 -0.00 -2.68

India 66.94 67.07 +0.19 -1.10

Brazil 3.26 3.26 -0.05 +21.34

Mexico 19.54 19.60 +0.30 -12.12

Debt Index Strip Spd Chg %Rtn Index

Sov’gn Debt EMBIG 371 0 .02 7 59.50 1