LONDON, Jan 2 (Reuters) - Emerging equities surged to 9-1/2 month highs on Wednesday after U.S. lawmakers reached a deal to avert the so-called fiscal cliff but Egyptian debt insurance costs rose on fears of a currency crisis.
Markets across Asia and emerging Europe powered to fresh highs on news that huge tax rises and spending cuts would not now kick in. That likely staves off the risk of recession in the world’s No. 1 economy.
“The news from the United States provides a massive relief. It was the black cloud on the horizon and that has now dissipated,” said Benoit Anne, head of EM research at Societe Generale. “The green light is flashing for emerging markets.”
With Chinese stocks at a six-month high and Hong Kong at 19-month peaks, MSCI’s main emerging equity index jumped 1.6 percent, its biggest one-day gain since mid-September.
Equity and bond buying also triggered a powerful surge in Asian currencies, forcing intervention by central banks from South Korea and Singapore.
Emerging European bourses such as Warsaw, Istanbul and Budapest surged over 1.5 percent , with Istanbul and Johannesburg hitting new record highs.
Emerging European currencies failed to rally however, with only the Polish zloty staying in positive territory against the euro, as dismal manufacturing indices kept the pressure on the forint and Czech crown .
The Egyptian pound fell to a new record low and credit default swaps surged 27 basis points to 4-1/2 month highs as fears of a currency crisis deepened.
Neil Shearing, an economist at Capital Economics, predicted the pound at 7 per dollar by year-end from the current 6.39 - a level the country’s finance minister predicted on Tuesday it would not reach.
“The most important issue for investors is how the pound will get there, whether the central bank can manage it in a transparent manner or will there be a messy devaluation,” Shearing said.
Egyptian dollar bonds however failed to succumb, with spreads tightening 8 bps on the EMBI Plus emerging debt index . The broader index saw spreads contract 8 bps to the tightest since Aug 2011.