LONDON: Emerging equities touched four-month highs on Thursday and headed for their best quarterly performance since mid-2015, while currencies also firmed thanks to a dollar retreat and a scaling back of U.S. rate rise forecasts.
While a China credit outlook cut from S&P punctured some of the buoyant mood and underscored the risks that still face the world's second biggest economy, Chinese markets did not show a strong reaction, with mainland stocks closing flat.
Receding prospects of aggressive U.S. rate rises are dominating markets this week following dovish comments by U.S. Federal Reserve chair Janet Yellen.
That has allowed MSCI's emerging equity index to build on Wednesday's 2.3 percent gain and put it on track to end the quarter with the best gains since mid-June 2015.
The index is also up 12.8 percent so far this month, its best monthly performance since October 2011, and other emerging assets have also outperformed.
(GRAPHIC-led article on Q1 EM performance: )
"We started the year assuming we would see four rate hikes in the United States but now people think we will see two and the risk is of less than two which is a benign development for emerging markets," said Peter Kinsella, head of EM research at Commerzbank.
"The risk of excessive increases in financing risks is no longer there."
But he noted the quarter's bounce was down to repricing of Fed policy and commodity price stabilisation, and while emerging market balance of payments deficits have contracted, growth remains weak in the developing world and domestic politics are a worry in many countries.
In South Africa, the opposition called on Thursday for President Jacob Zuma to be impeached while the country's top court gave him 45 days to repay some of the $16 million spent on refurbishing his home.
While Zuma's immediate removal is unlikely, South African assets may benefit if his weakened position strengthens the hand of more reformist elements in government. The rand is trading at the highest in 3-1/2 months against the dollar.
However, Johannesburg stocks fell 1 percent.
Kinsella said that unlike Brazil, South Africa's "saving grace is the central bank which has been resolute and ahead of the curve in raising rates and has been able to stabilise the rand."
The Turkish lira touched 4-1/2 month highs after data showed the economy expanded a stronger-than-expected 4 percent in 2015. However the outlook is clouded by security risks which caused a 10 percent drop in tourist arrivals last month.
The rouble shrugged off a slight oil price pullback to rise more than 1 percent to the dollar.
Earlier, Asian currencies also firmed versus the dollar. Reuters polls showed sentiment positive on China's yuan for the first time since mid-October and bullish bets rising on all other local units.
Overnight rates on offshore yuan plunged to minus 3.725 percent, the first time it is in negative territory, a move attributed to an exodus of traders from short yuan positions .
Romania's leu slipped 0.2 percent after the central bank held interest rates for the seventh time running. Czech rates are also expected to stay on hold.
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