RIO DE JANEIRO: Emerging markets recovered on Thursday from a sharp selloff as Latin American stocks and currencies rose, while Russia's rouble and Turkey's lira rebounded after policymakers pledged to take any necessary measures to stabilize their markets.
Traders said the recent panic selling had abated for now as markets priced in the current pace of stimulus withdrawal by the US Federal Reserve, though some analysts voiced concerns the respite would be short-lived.
The Fed on Wednesday said it would cut its monthly bond purchases by another $10 billion, and a Reuters poll on Thursday showed that economists expect the US central bank to maintain the pace of the taper throughout this year.
China's economic slowdown, however, left investors worried after an index of business conditions for Chinese manufacturers dipped for the first time in six months in January.
Many emerging countries, including Brazil and Chile, greatly rely on commodities exports to China, which makes their currencies vulnerable to further losses should the world's second-largest economy disappoint forecasts.
"China risk has risen, and US Treasury yields have fallen" since the beginning of the year, David Lubin, chief emerging market economist at Citi, wrote in a research note. "The net effect is to create a reminder that weak emerging markets still face a rather hostile environment for their exports."
Citi forecast real exchange rates to rise further in weak developing countries with "unfinanceable current account deficits" in order to cool domestic consumption and imports.
Turkey and South Africa were among countries that hiked interest rates this week, with only an initial limited impact on investor sentiment.
Currencies eventually steadied on Thursday as central banks from Istanbul to Moscow and Brasilia took new measures or stepped up verbal intervention to shore up their markets.
The rouble came off a record low against the euro and its lowest level in nearly five years against the dollar after the Russian central bank said it would make unlimited interventions if the exchange rate strays outside of its target corridor.
A Reuters poll of economists found that the Russian currency is expected to firm by mid-year to 34 per dollar after some short-term turbulence. It last traded at 34.89 per dollar, 0.5 percent stronger on the day.
The Turkish lira rose as much as 0.9 percent to 2.24 per dollar after the central bank said it may further tighten liquidity if necessary after massively raising all its interest rates late on Wednesday. It last traded at 2.266, 0.2 percent weaker for the day.
Romania's leu climbed 0.3 percent against the euro after the country's central bank intervened indirectly in the market. Even in India, whose currency has not sold off as much as its peers, policymakers pledged to take all necessary steps to ensure stability in the country's financial markets.
RELIEF IN LATAM MARKETS
On the other side of the Atlantic, the Brazilian real closed 0.8 percent stronger after the central bank announced it would auction $2.3 billion on the spot market on Friday through repurchase agreements.
The offer, which is intended to roll over similar dollar lines that expire next month, underscores Brazil's commitment to supporting liquidity in its foreign exchange market.
Other Latin American currencies were also in the black, with the Mexican peso gaining 0.2 percent and the Chilean peso 0.3 percent stronger.
A benchmark MSCI index of emerging market stocks erased losses after earlier hitting a 4-1/2-month low. The Latin American portion of the index gained 0.4 percent.
The recent emerging markets rout had gained traction as many investors deemed returns too low given the outlook for higher US Treasuries yields. Much of the outflow was triggered by retail investors, who are usually more averse to short-term volatility.
"Institutional investors have remained faithful, (but) it may be that some of these positions are starting to crack," said Manik Narain, emerging market strategist at UBS
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