LONDON, March 7 (Reuters) - Emerging stocks rose to a five-day high on Tuesday and currencies mostly firmed, as a March U.S. rate rise seems to have been priced in and Chinese reserves data offered some reassurance on financial stability in the world’s No. 2 economy.
MSCI’s emerging stocks index gained 0.3 percent for its second day in the black while average yield spreads on emerging sovereign bonds over U.S. Treasuries narrowed 2 basis points (bps) to 300 bps, the lowest since November 2014.
William Jackson, senior emerging markets economist at Capital Economics, said markets appeared to have absorbed the possibility of a March rate rise by the U.S. Federal Reserve.
“Also, the economic data are improving and perhaps the concerns of a sharp lurch towards protectionism in the U.S. have eased off a bit,” he added.
There are signs that investors in Asia have begun trading on U.S. President Donald Trump’s promises of tax cuts and higher infrastructure spending that will stimulate growth.
The Asian manufacturing markets delivered a strong performance with Hong Kong up 0.4 percent, and 0.6 percent gains on the Korea and Taiwan bourses.
Mainland Chinese shares also rose 0.2-0.3 percent after data showed China’s foreign exchange reserves unexpectedly rose for the first time in eight months in February, rebounding above $3 trillion as a regulatory crackdown helped staunch capital flows.
China has tightened rules on moving capital outside the country in recent months to support the yuan. The Chinese currency gained 0.2 percent in February, and is up 0.8 percent so far in 2017.
“We have seen capital control measures from the Chinese government ... as a result the situation has stabilised and is under control for now,” said Carl Wong, co-manager of the RAM Asian Bond Total Return Fund, based in Hong Kong.
Over a 12-month time horizon, however, he expects reserves to fall further: “The Chinese government wants to stop the outflow but the desire of Chinese citizens to move capital out of the country is very strong,” Wong added.
The yuan fell past the key 6.9 per dollar level on Tuesday after the central bank guided its official yuan midpoint to its weakest since mid-January.
Other currencies, such as the Turkish lira and Russian rouble, firmed as the dollar rally paused, with the lira up 0.8 percent to five-day highs, the rouble firming 0.2 percent.
Turkey’s central bank has pushed up the average cost of funding by 20-25 basis points in the last week against a background of rising inflation and U.S. Federal Reserve rate hike expectations.
“Perhaps the selloff was exacerbated by concerns about political interference at the central bank and now they have tightened maybe those fears have eased somewhat,” Jackson said.
“Markets may be a bit more confident that if the lira comes under further pressure with the Fed tightening, then the central bank will respond in time.”
Turkish five-year credit default swaps narrowed 2 basis points (bps) from Monday’s close to 240 bps, according to Markit data, a one-week low.
The rand has been supported by a rebound in commodities prices and is up almost 6 percent year-to-date. But it trimmed some of those gains after data showing South Africa’s economy contracted by 0.3 percent in the last 2016 quarter
Central European markets were awaiting a speech from Czech central bank chief Jiri Rusnok on the upcoming exit from the weak crown policy. Data confirmed the pressure faced by the central bank to continue this policy - it purchased a record 14.48 billion euros in January.
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