Emerging assets extend gains, pinning hopes on G20 action

The budget could be a turning point for the rand, which risks ratings downgrade to junk status.

The rand rose half a percent, approaching Friday’s seven-week highs but with the budget due on Wednesday, further gains looked unlikely.Picture: Christa Eybers/EWN

JOHANNESBURG - Emerging stocks rose 0.7 percent on Monday to extend last week's gains, tracking world equity markets higher on expectations of a policy action announcement from the G20 meeting this week.

The summit of central bankers and finance ministers from the world's 20 biggest economic powers is likely to include discussions on China's currency policy and possible actions that might reassure financial markets and lift global growth.

MSCI's main emerging equity index has risen 8.5 percent from 6-1/2-year lows hit a month ago, thanks to recent stabilisation on Western stocks, oil producers' efforts to prevent more crude price falls and a pricing out of aggressive United States rate rises. The index rose more than 4 percent last week.

Credit Agricole's head of EM strategy Sebastien Barbe said gains were also due to oil prices staying above $30 a barrel.

"Of course the G20 may focus a little bit on coordination on the FX side in particular, and also in terms of stimulus, but I would not expect too much from the G20 to be frank as different countries don't always have converging interests," Barbe said.

"So I would not bank too much on the G20 to provide lasting support," he said, calling the gains "fragile".

Some currencies, especially in Asia, are benefiting from tentative stock and bond market inflows. But data is still underscoring emerging economies' slowdown, with South Korean exports shrinking by a sixth versus year-ago levels in the first 20 days of February.

The Korean won rose 0.4 percent however on the possibility of more central bank action following the estimated sale of $2 billion on Friday, and after Mexico's shock intervention last week.

In emerging Europe, Russia's rouble rose 1 percent to the dollar, seesawing in line with oil, though local trade was thinned by a public holiday. South Africa's rand rose half a percent, approaching Friday's seven-week highs but with the budget due on Wednesday, further gains looked unlikely.

Citi told clients the budget could be a policy turning point for South Africa which risks ratings downgrades to junk status.

"At a bare minimum, the market appears to expect four main things: a realistic GDP outlook, expenditure cuts, revenue-raising, and a policy shift (for the better)," Citi said, noting that while a junk rating was likely from S&P in June, fiscal consolidation moves could head off downgrades from Fitch and Moody's.

Turkish assets also firmed, with the lira up a quarter percent and stocks rising 1.8 percent to two-week highs. The respite comes after heavy recent losses fuelled by cross-border tensions and a bomb attack in Ankara. However, the country remains one of the most vulnerable emerging markets.

In bond news, Peru and Lebanon are gearing up to tap markets, while banks are bidding to run Malaysia's upcoming dollar-denominated sukuk.

Emerging dollar bonds' average yield premium over US Treasuries fell under 500 basis points for the first time since early February.