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EMERGING MARKETS-Stocks hit one-week high on recovery hopes, FX on back foot

Posted on 04/01/2021

(There will be no EMEA-focused emerging market report on Friday and Monday on account of Easter holidays. Reuters will resume coverage on Tuesday, April 6)

* Asia, Russia, Turkey factory activity picks up in March

* Currencies slip as higher U.S. bond yields lift dollar

* South African rand clings to gains from strong trade data

* Russian rouble slips ahead of OPEC+ meeting on production cuts

April 1 (Reuters) – Emerging market stocks began the second quarter with strong gains on Thursday as data signalled a steady global economic recovery from a coronavirus-driven recession, while currencies eased under pressure from a firmer dollar.

A basket of emerging market equities jumped about 1.1% to a one-week high as data from Asia, Russia and Turkey showed a pickup in factory activity last month, although rising costs are creating new challenges for businesses.

The MSCI index of emerging market currencies , on the other hand, was down 0.1% by 0730 GMT after ending Wednesday with its steepest monthly fall since the global financial market meltdown in March 2020.

Stocks and currencies in the developing world have been hammered this year as expectations that a U.S. economic recovery would outpace that of other developed countries have sent U.S. bond yields to one-year highs and powered the dollar.

A recent Reuters poll found emerging market currencies would pare only some of their recent losses over the coming year, adding that another sell-off was likely in the next three months on the back of the so-called U.S. “reflation trade”.

The South African rand, one of the highest-yielding currencies in emerging markets, rose another 0.2% against the dollar a day after strong domestic trade data helped it firm about 1%.

“The strong goods trade balance reflects a cyclical recovery in commodity prices across the world and subdued demand for imports in the domestic economy due to the aftermath of the COVID-19 shock and aggressive fiscal consolidation plans,” Credit Suisse analyst Alexey Pogorelov said.

“A robust external balance is one reason behind the rand’s resilience to higher global yields and portfolio outflows.”

The Turkish lira firmed 0.8% as data showed manufacturing activity grew in March as new orders began to improve, while growth in output and employment continued in the sector.

A shock central bank overhaul sent the lira crashing 10% last month, exacerbating fears of higher inflation. A Reuters poll on Wednesday found inflation is expected to have jumped to 16.11% in March, rising for a sixth straight month.

Weekly data on Turkey’s forex reserves is due at 1130 GMT.

The oil-linked Russian rouble fell 0.2% ahead of a meeting of OPEC and its allies later on Thursday to decide on maintaining production cuts amid a resurgence in COVID-19 infections in some regions.

Although market participants expect OPEC to maintain the status quo on production cuts, that could still support oil prices and the rouble, said Antje Praefcke, FX analyst at Commerzbank.

For GRAPHIC on emerging market FX performance in 2021, see tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance in 2021, see tmsnrt.rs/2OusNdX