LONDON: Emerging stocks jumped 1.4 percent to one-week highs on Thursday and emerging currencies mostly firmed against a weaker dollar after the Federal Reserve signalled a softly-softly approach to raising rates.
Interest rate futures place 72 percent odds on a December U.S. rate rise but, with that move more or less priced in, focus has shifted to the pace of the tightening cycle, and many have been persuaded by Fed rhetoric that rises will proceed very slowly.
A 0.35 percent pullback in the dollar index allowed currencies such as Malaysian ringgit to firm more than 1 percent while the Turkish lira and South African rand made more subdued gains .
"The U.S. equity market has enjoyed a decent rebound in the past couple of days and the Fed is at pains to emphasise its tightening cycle will be a very gradual one, so that's providing support to emerging markets," said Manik Narain, EM strategist at UBS.
"But it is not likely to represent a sustained source of gains for EM. I think people will keep their powder dry going into the new year," Narain said, adding that a December Fed move along with the possibility of a smaller stimulus boost than expected from the European Central Bank could lead to volatility.
Emerging stocks are up 10 percent from late-August lows thanks also to signs of stabilisation in China. Mainland and Hong Kong-listed shares rose 1.4 percent , with the first house price rise in 14 months boosting property shares. Shanghai's property sub-index traded near three-month highs.
Russian assets stayed firm - though the rouble retreated slightly from one-week highs - on optimism that cheap valuations and easing tensions with the West will lure investors. Moscow shares rose almost 1 percent to nine-month highs.
Ten-year Russian yields are down about 30 basis points (bps) this week with spreads on Russia's portion of the GBI-EM index compressing 7 bps on Wednesday.
Narain noted that Russian local bonds are among the top performing emerging assets of 2015 with another 400 bps in rate cuts predicted next year by UBS economists.
"You are seeing a lot of investors moving back to Russian equities and local bonds and taking the view that the worst for the economy is likely over," he added.
Neighbouring Ukraine has also seen its newly restructured bonds rally this week after Moscow suggested a compromise over the $3 billion Ukraine bond that it holds. The deal is unlikely to materialise but the move has helped sentiment, along with a Fitch move to lift Ukraine's rating out of default to CCC.
The bonds retreated after rising 1.5-2.5 cents across the curve on Wednesday .
South Africa benchmark bond yields were at two-week lows before the conclusion of a central bank meeting at which the market expects policymakers to leave rates unchanged at 6 percent.
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