LONDON, Sept 1 (Reuters) - Roaring factory growth in Asia and China in particular helped emerging stocks to fresh three-year highs on Friday and put them on track for their third straight week of gains, while currencies firmed against the lacklustre dollar.
MSCI's benchmark emerging equity index rose 0.2 percent, delivering gains in seven of the past eight weeks.
At the same time, the average yield spread of emerging market sovereign bonds over U.S. Treasuries on the JPMorgan EMBI Global Diversified index has narrowed by 10 basis points (bps) over the week to 298 bps.
Emerging market currencies, measured by JPMorgan's ELMI Plus index, are near the highest since October 2014 Most currencies firmed on the day, with the South African rand up 0.4 percent and the Turkish lira up 0.3 percent.
Subdued U.S. consumer spending and inflation data has prompted markets to speculate that the U.S. Federal Reserve may not raise interest rates again this year, keeping the dollar close to 2-1/2-year lows.
Asian manufacturing on the other hand has proven robust, with Chinese factory activity expanding at the fastest pace in six months in August, indicating strong demand at home and abroad.
Activity was also strong across most other emerging and developed economies with exports up 17.4 percent year-on-year. Taiwanese and Indian manufacturing activity also expanded and euro zone activity rose strongly.
In emerging Europe, Hungarian, Czech and Polish manufacturing expanded, whilst Russia contracted.
"We've seen strong gains in EM over the past few months as the backdrop of a gradual slowdown in China and cautious stance from the Fed is rather benign," said William Jackson, senior emerging markets economist at Capital Economics.
He added that the Chinese factory data suggested industry remained "resilient", supporting metals prices, but U.S. non-farm payrolls data due out later in the day could give clues as to the timing of the next Fed rate hike, now seen as a fading prospect.
Chinese mainland shares rose 0.2 percent and looked set to end the week up almost 1 percent, whilst China's yuan firmed 0.33 percent against the dollar, hitting a fresh 14-month high.
The South Korean won also firmed 0.2 percent but South Korean stocks fell 0.2 percent and are set to end the week down 0.9 percent, as tensions with North Korea escalated after the nuclear state fired a missile over Japan.
Kenyan markets tumbled after a court judged recent elections to be invalid, raising fears of violent protests by supporters of Uhuru Kenyatta, who was re-elected president.
The $2 billion sovereign bond maturing 2024 fell 1.25 cents to 103.5 cents, according to Tradeweb data, its lowest since mid-August. The 2019 issue fell 0.75 cents to $102.75 cents.
The shilling fell 0.3 percent against the dollar.
In eastern Europe, Russian shares traded near three-month highs, helped by a weekly rally in Russian banks on relief that the central bank had stepped in to bail out private lender Otkritie. Otkritie shares fell a further half percent however.
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For RUSSIAN market report, see)
Emerging Markets Prices from Reuters Equities Latest Net Chg % Chg % Chg
Morgan Stanley Emrg Mkt Indx 1089.40 +1.70 +0.16 +26.34
Czech Rep 1025.61 +3.34 +0.33 +11.28
Poland 2511.61 -4.65 -0.18 +28.94
Hungary 37922.34 -169.92 -0.45 +18.50
Romania 8168.10 +116.07 +1.44 +15.29
Greece 823.75 -1.73 -0.21 +27.98
Russia 1097.66 +1.82 +0.17 -4.74
South Africa 50096.75 +99.48 +0.20 +14.11
Turkey 10010.49 -412.62 -0.37 +40.79
China 3367.30 +6.49 +0.19 +8.50
India 31878.91 +148.42 +0.47 +19.73
Currencies Latest Prev Local Local
close currency currency
% change % change
Czech Rep 26.04 26.11 +0.25 +3.71
Poland 4.25 4.25 +0.02 +3.74
Hungary 304.96 305.63 +0.22 +1.27
Romania 4.59 4.60 +0.07 -1.24
Serbia 119.17 119.10 -0.06 +3.51
Russia 58.03 57.99 -0.05 +5.58
Kazakhstan 337.99 337.99 +0.00 -1.28
Ukraine 25.74 25.66 -0.31 +4.90
South Africa 12.95 12.99 +0.29 +6.01
Kenya 102.80 102.80 +0.00 -0.42
Israel 3.58 3.58 +0.10 +7.59
Turkey 3.44 3.45 +0.22 +2.40
China 6.57 6.59 +0.32 +5.71
India 63.96 63.93 -0.05 +6.23
Brazil 3.15 3.15 +0.00 +3.36
Mexico 17.86 17.88 +0.14 +16.00
Debt Index Strip Spd Chg %Rtn Index
Sov'gn Debt EMBIG 319 -1 .03 8 03.97 1
Additional reporting by Alexander Winning and Sujata Rao, editing by Pritha Sarkar