Emerging market stocks gain on US-China trade hopes, FX firms

Emerging market stocks rose on Friday on risk sentiment, heading for their best weekly performance since early November, while developing world currencies gained against the dollar after US Federal Reserve Chairman Jerome Powell’s dovish comments.

Investors took heart from US Treasury Secretary Steven Mnuchin saying on Thursday that Chinese Vice Premier Liu He was likely to visit Washington for trade talks later this month, while Powell’s reiteration that the Fed will be patient about raising borrowing costs supported emerging market currencies.

MSCI’s developing world stocks index was up 0.4%. Stocks in China , South Korea and Taiwan, which have large weightings on the MSCI benchmark, all ended at least 0.4% higher.

Paul Fage, a senior emerging markets strategist with TD Securities, said emerging markets were taking a positive view of Powell’s comments and a rally in emerging market currencies would “have legs” if there was progress on the US-China trade front.

China’s onshore yuan finished its domestic session primed for its biggest weekly gain in about thirteen and a half years.

Currencies in the developing world were hit hard in 2018 as the bruising US-China trade war and rising US interest rates combined to dim the sheen of riskier developing world assets.

South African stocks rose 1% while the rand firmed for a third straight day. A half percent rise on the day set the currency of the commodity powerhouse on pace to clock a 1.4% weekly gain.

“In South Africa, the rand is quite sensitive to Fed policy so to the extent that the move is more dovish, that is a positive for ‘higher beta’ currencies,” Fage said, referring to currencies displaying relatively more volatility.

The Russian rouble held steady while higher oil prices helped local stocks notch a half a percent gain.

While Turkish stocks added 0.8%, the lira was soft. Data showed Turkey’s current account surplus in November failed to meaningfully top a forecast by economists Reuters had polled.

The lira has slid over 2.5% this year, following a year to forget in 2018 which featured a diplomatic dispute with the United States and investors’ doubts about the independence of the Turkish central bank. The bank jacked up borrowing costs by a bumper 625 basis points in September to stabilise the economy.

“In our view, the country needs predictable/credible/transparent policies to gain the confidence of foreign investors and attract foreign capital,” wrote Berna Bayazitoglu, Credit Suisse’s lead economist for Turkey, in a note on Friday.

“Unfortunately, the track record since the monetary policy tightening on September 13 (which has lured carry trade inflows) has primarily included ad hoc policies.”

Lebanese dollar-denominated bonds were steady after slumping on Thursday.

Lebanon’s finance minister said on Thursday that the country was studying ways to manage its public debt and its structure as part of public finance reform plans, after he was cited as saying the plan included restructuring public debt.