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Stocks bounce off 2-wk lows; rouble jumps

Bahraini CDS, bond yields fall as political tensions ease.

February 25, 2011 2:49 by

Emerging stocks snapped a four-day losing streak on Friday despite continuing tensions in the Middle East, while an interest rate rise in Russia drove the rouble to a 15-month high against the dollar.

MSCI’s benchmark emerging equity index  added 0.6 percent as Saudi Arabia’s pledge to plug any disruption in crude supply, soothing some worries over high oil prices and prodding some investors back in to higher-risk assets.

The market has lost 2.5 percent so far this week.

Oil’s price spike to 2-1/2-year highs has prompted concerns about a fragile global recovery, but some analysts say these fears may be a tad overdone and point to recent data that shows the world economy remains on track.

The euro’s rise to 2011 highs against the dollar also helped bring back some buying of emerging assets.

“What we are seeing is a bit of relief after a week of hectic trading,” said Elisabeth Gruie, emerging markets strategist at BNP Paribas.

“Investors are just taking a breather and waiting to see how demonstrations in the Middle East will unfold today but I wouldn’t see this as a return to emerging markets.” Shares in emerging European markets also rose , led by Turkish stocks which rebounded 1 percent  after suffering their biggest one-day loss in nine-months on Thursday.

Istanbul shares have lost 7 percent so far this year as Turkey’s reliance on hydrocarbon imports and the exposure of its corporates to North Africa makes it particularly vulnerable to rising oil prices and instability in the Middle East.

Investors pulled more cash out of emerging equity funds last week, data from EPFR showed. They withdrew $1.9 billion but this was down from the $5.4 billion shed in the previous week, suggesting some of the pressure on risky assets may be abating.


One beneficiary of the high oil price has been Russia, which this week placed a well-subscribed rouble-denominated Eurobond though the government decided to cut the amount on offer in order to keep the yield premium down . Investors are keen to gain exposure to the rouble and their expectations of currency appreciation received more fuel as the central bank surprised markets by raising all of its key interest rates to fight accelerating inflation. [ID:nLDE71N2BM].

That propelled the rouble to a 15-month high against the dollar . While the rise may cause concern among Russian policymakers who are still fretting about economic growth, investors continue to bet on a stronger rouble.

“With economic growth gathering momentum, rate hikes in the pipeline and geopolitical events triggering a surge in oil prices, the rouble is set for more appreciation versus basket in the short term,” Societe Generale analysts told clients.

The central bank is also likely to accept more currency flexibility to tackle inflation, they said adding they favoured currencies of oil exporters Russia and Mexico over South African rand, Turkish lira, Israeli shekel and the Hungarian forint.

All these currencies were firmer on Friday against the weaker dollar, with the lira and shekel up around 0.2 percent and the rand gaining over half a percent .

Israel is seen as especially vulnerable to the political turbulence in the Middle East as this will boost its security costs while raising the price of energy imports.

But recent shekel weakness comes after a long period of strength which forced the central bank into measures to dampen the currency. The shekel is down over one percent this week.

“(Central bank governor Stanley) Fischer must be rejoicing.. as long as the (shekel’s fall) is not disorderly it should be fine,” Gruie said.

But she said the rise in Israeli yields was a concern. One-year yields are at their highest since Oct 2008 and have risen almost half a percent since the start of February. “The whole curve has been shifting higher and if that’s too fast, it would be negative for public finances,” Gruie added.

In line with general market moves, debt insurance costs across emerging markets also declined, with Bahraini 5-year credit default swaps falling 12 basis points to 303 bps, according to Markit.

Bahrain’s benchmark 2014 Islamic bond rose more than 2 points in price to a one-week high after the government called for a national dialogue with protesters.

Central European currencies firmed slightly against the euro. Traders are watching developments in Hungary, which will announce fiscal consolidation plans on Tuesday .

This has supported the country’s currency and bonds, with Thursday’s bond auctions seeing strong demand and allowing the government to sell more debt than expected.

(Additional reporting by Sujata Rao, editing by Patrick Graham)

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