Emerging Markets Float Over Brexit Turmoil to Clock Up Gains

Photographer: Brent Lewin/Bloomberg

With China said to be considering concessions on trade and two Asian central banks displaying their anti-inflation credentials with tighter monetary policy, emerging markets stayed on course for their best two-day performance since the start of the month.

Though the Brexit drama unfolding in the U.K. was a reminder of the fragility of any risk rally, stocks and currencies were broadly stronger, with traders waiting to see if Mexico’s central bank will complete a hat-trick of rate increases later.

  • MSCI Inc.’s index of equities rose as much as 1.2 percent, and gauge of currencies climbed as much as 0.4 percent, the most in about two weeks on a closing basis
  • Most EM currencies climbed against the dollar Thursday, thought a majority of central European currencies declined briefly against both the euro and the dollar

Indonesia’s rupiah was among the biggest gainers after the central bank surprised investors with a 25 basis-point increase to its reverse repo rate, as was the Philippine peso, which was also bolstered by a rate boost. The rand and lira led the advance in currencies.
Read More: Two Asia Rate Hikes in One Day. Here’s What Market Watchers Say

Federal Reserve Chairman Jerome Powell’s warning about headwinds to the U.S. economy next year, which weighed on the dollar, helped underpin emerging-market currencies. That was before several U.K. officials resigned in protest over the Brexit divorce deal. Meanwhile, China was said to consider some commitments to the Trump administration on trade, an issue that’s been driving up volatility.

Powell “is setting a very neutral signal,” indicating the Fed is sensitive to the fact that global growth is under some pressure, Eric Robertsen, Standard Chartered’s Singapore-based global head of foreign-exchange, rates and credit research, said in Bloomberg TV interview. The bank has “a cautiously optimistic outlook” on emerging markets, as some negative external factors are starting to stabilize, he said.

More comments:

  • “The dollar is a little weaker across the board for no good reason,” said Chris Turner, the head of foreign FX at ING Bank. “We got a surprise rate hike in Indonesia and the PBOC fixed the renminbi a little firmer. So some temporary relief”
  • “It seems that at least some market participants interpreted comments from Governor Powell as not sufficiently hawkish to support the dollar, which is broadly softer against its G10 peers and EM currencies,” said Rabobank strategist Piotr Matys
    • “The USD will continue to benefit in the coming months from the ongoing widening in interest rate differentials as the Fed is on track to raise rates further in December with more hikes to come next year, according to the dot plot.”