LONDON: Emerging stocks rebounded on Friday and were set for gains of almost 7 percent in the third quarter despite a torrid week in which a resurgent dollar and rising US Treasury yields prompted most investors to dump emerging assets.
MSCI's benchmark emerging equity index rose 0.7 percent, recovering from five-week lows touched on Thursday.
But there is nervousness about the prospect of an interest rate rise this year by the US Federal Reserve, with MSCI's EM index falling 2 percent over the week.
Emerging currencies have also been bruised by the best week of 2017 for the dollar and JPMorgan's ELMI Plus index, widely used as a proxy for emerging currencies, is at a five-week low, having lost 1.4 percent over the week
That has taken some of the shine off a rally which propelled emerging stocks 6.8 percent higher since end-June and around 25 percent since the start of the year.
Average yields on the GBI-EM index of local emerging market bonds rose back above 6 percent for the first time since early-September, up roughly seven basis points over the week
But not everyone is convinced the bull run is over.
"We think the market has probably mistaken specific hawkishness about the next (Fed) meeting...with more general hawkishness about a faster or larger series of hikes - which we don't see," said Peter Attard Montalto, a senior EM strategist at Nomura in London.
"As such we think EM assets as a whole can perform better into early Q4 bar any major shocks."
Friday's gains in equities were led by bourses in Hungary , Indonesia and South Africa, all of which rose by 0.8 percent or more.
Turkish shares edged higher, but data showing a widening trade deficit disappointed markets, with risks for the lira in the longer term.
Emerging currencies were broadly stronger on Friday, with China's yuan, South Africa's rand and India's rupee all gaining around 0.2 percent against the dollar, recouping some losses from earlier in the week.
Morgan Stanley strategists said they remained keen on several emerging currencies, including Russia's rouble, Poland's zloty and Malaysia's ringgit.
"EM return expectations still look attractive but the currencies have been reacting to dollar strength this week. We see no reason to panic as fundamental and valuation justifications remain intact," they told clients, adding that the rouble in particular would be supported by some of the highest yields in the sector.
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