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Hopes of global monetary support lift EM stocks, FX

by Business News Report

Emerging market stocks rose on Monday after their worst week in 8-1/2 years, and an index of developing world currencies rebounded from near five-month lows on hopes of a global monetary response to offset the impact of the coronavirus. Markets worldwide were hammered last week, wiping more than $5 trillion from world stocks, as the fast-spreading outbreak sounded alarm bells for a likely global recession. That increased bets that central banks would step in to help economies weather damage from the outbreak, as evidenced by dismal Chinese factory activity. The U.S. Federal Reserve and Bank of Japan both said action would be taken to stabilise markets and support their economies. MSCI’s index of emerging market shares rose 1.3%, after losing 7.3% last week, while the currencies counterpart firmed 0.7%, reversing Friday’s losses.

Heavily weighted mainland China shares jumped more than 3% each after Beijing reported a sharp fall in new confirmed cases of the virus on Sunday, and on hopes that the People’s Bank of China will be among central banks joining the coordinated effort. Main stock indexes in Turkey, Russia, South Africa and Poland all made handsome gains, rising between 2.5% and 3.2%. “The moves in emerging markets are not surprising given the talks, particularly by the Fed on prospective rate cuts in the U.S.,” said William Jackson, chief emerging markets economist at Capital Economics in London. “That seems to offset the news from the Chinese PMIs.”

The yuan firmed to over two-week highs against a dollar weakened by Fed rate cut expectations. A cut in U.S. rates increases appeal for higher yielding emerging market currencies, while more broadly, a robust U.S. economy translates to steady imports from export-reliant emerging markets.

South Africa’s rand rallied up to 1.4% after hitting their lowest since 2016. With a possible downgrade from Moody’s looming, investors will watch gross domestic growth numbers due on Tuesday. Analysts expect a contraction but say the rand may be more influenced by global factors.

The Turkish lira rebounded from 17-month lows, with data showing manufacturing activity expanding for the second month in February. This comes after Friday’s numbers showed the Turkish economy rebounded strongly in the fourth quarter.

But Syria tensions still persisted where Russia is backing government forces against Turkey. Turkey shot down two Syrian warplanes over Idlib on Sunday and struck a military airport well beyond its front lines following the death of dozens of Turkish soldiers last week. The Kremlin struck a more conciliatory tone on Monday saying Russia did not want war.

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