LONDON – Emerging equities steadied on Thursday, helped by modest gains in Asia as investors waited to see if U.S. President Donald Trump could push through a health bill to replace “Obamacare,” opening the way for tax cuts.
Emerging assets have rallied hard this year on the back of Trump’s promised fiscal splurge but stumbled on Wednesday after his healthcare bill stalled in Congress, raising doubts about his ability to implement the pledges.
“That called into question all the other relevant reforms that the market was pricing in,” said Alejandro Alvaro, a global emerging market bond fund manager at Jupiter Asset Management.
MSCI’s emerging equity index edged slightly higher, rising for the ninth day in the last 10, helped by gains in Asia and Russia as oil prices rebounded.
Emerging sovereign dollar bond spreads over U.S. Treasuries have narrowed by 56 basis points (bps) since the start of the year, and are currently trading at around 310 bps. After Wednesday’s sell off they are at a one-week high.
“It’s a moment for the asset class to have a reality check in terms of how much spreads have been driven by technicals and not fundamentals,” Alvaro added.
Emerging markets remain broadly supported by economic data. South African government bond yields touched the lowest since October 2015, after data showed inflation slowing and the current account deficit at six-year lows
While most currencies stayed on the back foot against the dollar, the rouble gained 0.4 percent before Friday’s central bank meeting that is expected by 15 out of 25 analysts in a Reuters poll to hold rates at 10 percent.
“We think the CBR (Ciber, Inc.) will choose between a ‘dovish on-hold’ and a ‘cautious 25 basis points cut’, seemingly with nearly equal probability,” ING Bank analyst Dmitry Polevoy told clients.
Other emerging European markets struggled, with Polish stocks down 0.25 percent, led by a 3.5 percent loss in the shares of utility PZU (Powszenchy Zaklad Ubezpieczen SA) after the sacking of its chief executive.
Earlier, mainland Chinese stocks rose 0.35 percent as hopes resurfaced that MSCI (Morgan Stanley Capital International) would include A-shares in its emerging index.
The Czech crown’s implied euro rate in the three-month forward market continued to retreat from the multi-year highs it hit earlier this week.
Nigeria’s naira meanwhile weakened in the non-deliverable forwards market, after central bank sold dollars at a weaker naira rate to boost liquidity on the official market and narrow the naira’s spread at the black market..
The six-month contract was at one-month lows, though it approached 400 per dollar a month ago.