LONDON: Emerging equities steadied on Friday with offshore-listed Brazilian assets clawing back ground after posting hefty losses on Thursday, when political turmoil in Brazil and the United States prompted a broad-based sell off.
Brazilian assets plummeted on Thursday after allegations that President Michel Temer condoned bribes to silence a key witness in a corruption probe, deflating investor optimism about the prospects for his ambitious pension and labour reform agenda. Temer has refused to resign.
However, London-listed Brazil exchange traded funds rebounded on Friday, with the iShares MSCI Brazil up 1.5 percent, and HSBC's MSCI Brazil and DBX MSCI Brazil up 2 percent.
Brazilian stocks are down 9.7 percent so far for the week, after falling 8.7 percent on Thursday - their biggest one-day drop since the 2008 financial crisis. The real steadied on Friday after tumbling more than 7 percent against the dollar on Thursday, its biggest daily decline since 2002.
The average yield spread of Brazilian sovereign bonds over US Treasuries on the JP Morgan EMBI Global Diversified was trading at 295 basis points (bps), after blowing out to 297 bps on Thursday - its widest since January.
"It is very worrisome for Brazil... this is a very serious thing," said Alejo Czerwonko, director of emerging markets investment strategy at UBS, though he added that the potential for contagion for other emerging markets was limited.
"Countries like Argentina, that are highly linked to Brazil are also being affected, but the EM rally will depend on different factors...We're talking about impeachment in the US too."
The broader emerging markets complex has been clobbered by a ballooning political crisis in Washington this week, with reports that President Donald Trump tried to interfere with a federal investigation into his campaign's links with Russia.
"Europe is not fully out of the woods yet either," Czerwonko said. "If there's anything the last year has taught us it's that political uncertainty is not an EM specific phenomenon."
MSCI's benchmark emerging equities rose 0.5 percent on Friday after falling 2 percent on Thursday, its biggest one-day loss since November. However, the index was on track for a weekly fall of 1 percent - its first decline after four straight weeks of gains.
Amongst the strongest performers on the day were Russian dollar-denominated stocks which gained 0.9 percent, helped by a 1.2 percent rise in oil prices.
Indonesian stocks leapt 3 percent to hit a record high in their biggest one-day gain since August 2016, after ratings agency S&P upgraded the sovereign's bond rating to investment grade from junk.
The Indonesian rupiah firmed 0.25 percent against the dollar, rebounding from a four-month low.
With the dollar down 0.4 percent against a basket of currencies, emerging currencies gained across the board.
The Turkish lira firmed 1 percent, whilst commodity-related currencies were supported by gains in oil, copper and gold. The rouble firmed 0.8 percent, the Kazakhstan tenge 0.5 percent and the South African rand around 1 percent.
The Mexican peso also strengthened 0.2 percent against the dollar after the central bank unexpectedly hiked its key interest rate on Thursday by 25 basis points in an attempt to check inflation. At 6.75 percent, the rate is now at its highest level since March 2009.
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