EMERGING MARKETS-Stocks up again; inflation, M.East in focus
Published: Friday, 18 Feb 2011 | 8:17 AM ET
By Isabel Coles LONDON, Feb 18 (Reuters) - Emerging stocks were headed for their best week in more than two months on Friday, taking cues from global stocks and largely brushing off policy tightening in China as well as unrest in the Middle East, at least for now. MSCI's emerging index added 0.8 percent, putting it on track for its biggest weekly rise since early December with gains of around 2.6 percent, while global stocks touched a fresh 30-month high. But outflows from emerging markets showed no sign of easing, with investors pulling $5.5 billion from emerging market equity funds in the week ending 16 Feb., according to data from EPFR, pouring it into developed market equities instead, which attracted inflows of $12 billion over the same period. "We are caught between quite a positive global macro story with a continuous recovery in the United States and Europe that clearly would indicate risk on, but in emerging markets there are valuation issues, the Middle East (unrest) and rising inflation everywhere," said Lars Christensen, chief emerging market analyst at Danske Bank in Copenhagen. "So with all this going on, it's hard to find direction". Equities in commodity-exporting Russia and South Africa extended losses after resource-hungry China raised reserve requirements, stirring fears that tighter policy would dampen appetite for metals and oil. But overall, emerging markets were sanguine about the move. "That's the way China needs to go. We are seeing increased inflation pressures globally and one of the key issues is China. They need to tighten policy," Christensen said. Inflation-ridden China, India and Brazil were worst-hit by the emerging market outflows this past week, EPFR said. Bahraini instruments also suffered, as thousands gathered to bury protestors killed in a crackdown on anti-government demonstrators. But the impact on other markets was minimal. "One striking feature the crisis shares with others in the region is that the investment community appears to be the last to panic," economists at Exotix said in a note. Bahrain's dinar currency slipped in the one-year forward market, but was still above seven-month lows hit earlier this month. Debt insurance costs for Bahrain rose 19 basis points to a fresh 18-month high of 300 bps, according to data monitor Markit, and the country's benchmark 2020 bond slipped to 93.5 points, taking this year's losses to 8 points so far. Fitch ratings agency cut its outlook on Bahrain from stable to negative on Thursday. Regional tensions pushed Israeli 5-year credit default swaps up 3 bps to 150 bps, their highest levels since end-July 2009. RATES All 20 economists polled by Reuters expect Israel to raise its benchmark lending rate by a quarter point on Monday, following high inflation numbers earlier this week. But the shekel fell 0.4 percent, curbed by regional instability and the central bank's tough stance on the currency. "The Bank of Israel has shown commitment to limiting shekel strength, and we don't think they will hesitate to intervene in forex markets and/or implement further measures to restrict a sharp move lower in dollar-shekel," BNP Paribas said in a note. Hungary's forint was also down 0.5 percent ahead of a central bank meeting on Monday, when policymakers are expected to leave interest rates on hold. Having outperformed other central European currencies this year with gains of 3.2 percent so far, the unit has begun to drift, with markets betting the central bank has finished its tightening cycle for now. But across the developing world, central banks are getting tough on inflation. Chile raised rates on Thursday and hinted of more to come as it resolved to fight inflation even if that means tolerating a stronger peso. Balancing inflation concerns and currency appreciation is also top of the agenda in Turkey. The lira shed 0.6 percent and Istanbul's main index was more or less flat, pausing from a three-day rally following the central bank's decision this week to leave rates and banks' required reserve ratios unchanged. As a share of assets under management, outflows from Turkish equity funds were stronger than in any other emerging market in the week ending Feb.16 according to EPFR. That suggests investors are unconvinced about the central bank's unorthodox policy and its inflation-fighting credentials. Emerging European stocks as measured by ThomsonReuters lagged, falling 0.6 percent. Elsewhere, the Ugandan shilling was near a lifetime low as the country went to the polls. Many fear that things could turn nasty as the opposition plans protests if the poll is deemed rigged.
Published: Friday, 18 Feb 2011 | 8:17 AM ET
By Isabel Coles LONDON, Feb 18 (Reuters) - Emerging stocks were headed for their best week in more than two months on Friday, taking cues from global stocks and largely brushing off policy tightening in China as well as unrest in the Middle East, at least for now. MSCI's emerging index added 0.8 percent, putting it on track for its biggest weekly rise since early December with gains of around 2.6 percent, while global stocks touched a fresh 30-month high. But outflows from emerging markets showed no sign of easing, with investors pulling $5.5 billion from emerging market equity funds in the week ending 16 Feb., according to data from EPFR, pouring it into developed market equities instead, which attracted inflows of $12 billion over the same period. "We are caught between quite a positive global macro story with a continuous recovery in the United States and Europe that clearly would indicate risk on, but in emerging markets there are valuation issues, the Middle East (unrest) and rising inflation everywhere," said Lars Christensen, chief emerging market analyst at Danske Bank in Copenhagen. "So with all this going on, it's hard to find direction". Equities in commodity-exporting Russia and South Africa extended losses after resource-hungry China raised reserve requirements, stirring fears that tighter policy would dampen appetite for metals and oil. But overall, emerging markets were sanguine about the move. "That's the way China needs to go. We are seeing increased inflation pressures globally and one of the key issues is China. They need to tighten policy," Christensen said. Inflation-ridden China, India and Brazil were worst-hit by the emerging market outflows this past week, EPFR said. Bahraini instruments also suffered, as thousands gathered to bury protestors killed in a crackdown on anti-government demonstrators. But the impact on other markets was minimal. "One striking feature the crisis shares with others in the region is that the investment community appears to be the last to panic," economists at Exotix said in a note. Bahrain's dinar currency slipped in the one-year forward market, but was still above seven-month lows hit earlier this month. Debt insurance costs for Bahrain rose 19 basis points to a fresh 18-month high of 300 bps, according to data monitor Markit, and the country's benchmark 2020 bond slipped to 93.5 points, taking this year's losses to 8 points so far. Fitch ratings agency cut its outlook on Bahrain from stable to negative on Thursday. Regional tensions pushed Israeli 5-year credit default swaps up 3 bps to 150 bps, their highest levels since end-July 2009. RATES All 20 economists polled by Reuters expect Israel to raise its benchmark lending rate by a quarter point on Monday, following high inflation numbers earlier this week. But the shekel fell 0.4 percent, curbed by regional instability and the central bank's tough stance on the currency. "The Bank of Israel has shown commitment to limiting shekel strength, and we don't think they will hesitate to intervene in forex markets and/or implement further measures to restrict a sharp move lower in dollar-shekel," BNP Paribas said in a note. Hungary's forint was also down 0.5 percent ahead of a central bank meeting on Monday, when policymakers are expected to leave interest rates on hold. Having outperformed other central European currencies this year with gains of 3.2 percent so far, the unit has begun to drift, with markets betting the central bank has finished its tightening cycle for now. But across the developing world, central banks are getting tough on inflation. Chile raised rates on Thursday and hinted of more to come as it resolved to fight inflation even if that means tolerating a stronger peso. Balancing inflation concerns and currency appreciation is also top of the agenda in Turkey. The lira shed 0.6 percent and Istanbul's main index was more or less flat, pausing from a three-day rally following the central bank's decision this week to leave rates and banks' required reserve ratios unchanged. As a share of assets under management, outflows from Turkish equity funds were stronger than in any other emerging market in the week ending Feb.16 according to EPFR. That suggests investors are unconvinced about the central bank's unorthodox policy and its inflation-fighting credentials. Emerging European stocks as measured by ThomsonReuters lagged, falling 0.6 percent. Elsewhere, the Ugandan shilling was near a lifetime low as the country went to the polls. Many fear that things could turn nasty as the opposition plans protests if the poll is deemed rigged.