EM equities extend rally as China, Fed worries ebb

Emerging market stocks and currencies extended a rally on Thursday after the US Federal Reserve’s policy decision offered no surprises, while the promise of stimulus in China and optimism around peace talks in Ukraine also aided sentiment.

The Fed on Wednesday raised the policy rate by a quarter point, as expected, and telegraphed equivalent hikes at every remaining meeting this year to combat inflation.

MSCI’s EM stocks index was up 3.8% after leaping 5.3% on Wednesday, while its currencies counterpart added 0.5% as the dollar fell.

Both indexes are set to end the week higher, if gains hold.

“While (the Fed’s) rate hike and aggressive forward guidance could have weighed on EM currencies via widening yield differentials, FX markets took the decision largely in their stride and are confident the US is well-positioned to handle tighter monetary policy,” said Ima Sammani, FX market analyst with Monex Europe.

Following the Fed’s move, Taiwan’s central bank surprised with a 25 basis points hike, while in Indonesia, the benchmark borrowing rate was kept on hold, as expected. Investors now await Turkey’s decision at 1100 GMT where the key rate is seen held at 14% despite the Ukraine war and soaring energy prices.

Turkey’s lira slipped 0.3% against the dollar, snapping four straight days of gains.

“Because of the sideways trend in USD-TRY for a couple of months now, (Turkey’s central bank) probably does not feel much pressure to act in any direction immediately,” said Commerzbank EM and FX analyst Tatha Ghose.

“As Turkey’s real interest rate stays deeply negative, though, the next big move in USD-TRY may be getting closer.”

While tensions about Ukraine war remained high, investors took heart from progress in ceasefire talks between the two countries. Comments from Chinese officials pledging stimulus measures for China’s wobbly economy also kept risk appetite buoyed.

Chinese stocks extended gains, with Hong Kong shares surging 7%, while stocks elsewhere in the emerging markets universe gained between 0.3% and 2.2%

Meanwhile, Russia’s ruble firmed more than 1% in offshore trading as investors awaited news on whether Russia had paid coupons on sovereign debt, which were due on Wednesday, or whether the countdown on a 30-day grace period had started.

Russia has set out strict rules for foreigners seeking permits to buy and sell Russian securities and real estate, Reuters reported, as details emerge of new state controls on investment in response to Western sanctions.

The sanctions-hit the country’s central bank meets on Friday, where its emergency policy rate is expected to be held at 20%.

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