Emerging markets started the week on a high on Monday, with stocks at a two-year peak, the rouble, rand and lira up for a fourth straight session and hard currency bonds at their strongest since late-2014. The rally came thanks to an oil-led charge in commodity markets, as well as weakness in the dollar after lacklustre economic data on Friday had cooled what had been growing expectations for a rapid-fire run of U.S. interest rate hikes.
Russia’s rouble jumped almost one percent to under 56.5 per dollar as the Russian and Saudi energy ministers said oil production cuts would be extended, catapulting Brent and WTI prices higher. Russian shares led the pack with a more than 1.2-percent rise after climbs across much of Asia had lifted MSCI’s 23-country EM index to its highest since May 2015 and put it on track for a sixth day of gains for the first time since August.
“The news that there’s been a consensus on extending the OPEC cuts has provided some support to oil prices and some of the oil currencies such as the rouble,” said Capital Economics’ senior emerging markets economist William Jackson. “Maybe that has spread through to a more general improvement in sentiment towards emerging markets.”
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There was little impact, meanwhile, from weaker-than-expected Chinese data, where factory output and fixed asset investment growth cooled in April after a strong first quarter. The yuan edged marginally lower, but shares in Shanghai ended up 0.4 percent, steadying after falling almost 6 percent since early April.
Elsewhere Pakistan shares hit their latest record high and South Korean stocks shrugged off a fresh missile test in North Korea to finish 0.2 percent higher and just below their all-time peak. India’s rupee also climbed 0.3 percent on news that consumer inflation eased in April to its lowest in at least five years.
The country’s improving inflation performance has pushed real interest rates – the amount by which they exceed inflation – strongly into positive territory. That has attracted buyers to the bond market and driven stocks to double-digit percentage gains this year. Ten-year yields slipped to one-month low.
Morgan Stanley investment flow data published on Monday underscored the current fashion for emerging markets assets. Dedicated EM funds that it tracks reported inflows of $2.32 billion over the last week, the eighth straight week of positive momentum, its figures showed.
That included a 15th straight week of inflows for EM bond funds. All EM countries reported equity inflows too with Greece, Colombia and Qatar seeing the largest moves relative to the funds’ assets under management.