US rate hike pushes up EM equities

EMERGING equities rose to a near two-week high yesterday after the US Federal Reserve delivered a widely expected rate rise but remained cautious on the inflation outlook, while Turkey’s lira slipped before a central bank meeting.

MSCI’s benchmark emerging equities index gained 0.2% after the Federal Reserve raised rates by a quarter-percent but said weakness in inflation remained a concern.

The average yield spread of emerging dollar debt over US Treasuries narrowed to 287 basis points (bps), off a twoweek high of 291 bps.

“We would need to see an incredible pick-up in inflation and rate hikes to impact emerging markets, but at present there is no basis for such an assumption (that there would be a pick-up in the pace of rate hikes),” said Esther Reichelt, a strategist at Commerzbank in Frankfurt. “Generally, markets are correct to be calm.”

The dollar weakened against a basket of currencies and US yields fell, but some emerging currencies struggled nonetheless to make gains as investors awaited central bank decisions.

The most closely eyed is Turkey, where a Reuters poll predicted the bank would raise its late liquidity window rate by 100bps to combat inflation at a 14-year high, even though President Tayyip Erdogan opposes higher rates.

The lira eased 0.5%, slipping off one-month highs. It has firmed recently on the back of strong economic growth and rate rise expectations.

“If they don’t deliver we definitely see a higher risk for the lira to depreciate,” Reichelt said.

“They need to prove to the market they are ready to act despite the political pressure, otherwise markets will lose all trust in the central bank.”

Earlier, China’s yuan hit twoweek highs and stocks fell 0.6% after the central bank raised money market rates to prevent destabilising capital outflows.

Ten-year Chinese bond yields fell 2 to 3 basis points, because some had expected a bigger move, a trader said.

The rand weakened 0.4%. Although data showed South Africa’s current account deficit narrowing slightly, politics weighed, with a judge instructing President Jacob Zuma to set up a judicial inquiry into state influence-peddling.

Shares in Sibanye-Stillwater fell 7% to two-month lows after it agreed to buy platinum producer Lonmin. – Reuters