China helps lift emerging stocks to six-and-a-half-month peak

LONDON Thu May 22, 2014 10:18am BST

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LONDON (Reuters) - Emerging-market stocks raced to a 6 1/2-month high on Thursday as an encouraging survey on Chinese factory activity and a calmer Russia-Ukraine situation whetted investor appetite for risk.

Federal Reserve minutes that showed the central bank was in no hurry to raise interest rates also supported risk appetite.

Turkish markets - sensitive to global liquidity - rose broadly, with investors keeping an eye on a central bank monetary policy decision due later. The central bank is expected to leave interest rate on hold.

Russia's rouble held steady while stocks were mixed before Sunday's presidential election in Ukraine. The West has threatened tougher sanctions against Russia if it disrupts the election.

A preliminary HSBC survey showed China's factory sector turned in its best performance in five months in May. However, although overall manufacturing growth still contracted slightly, suggesting the outlook remains murky.

"There are three sources of happiness for EM. Today's Chinese data was stronger and iron ore prices have risen, which is good for emerging-market infrastructure companies," said Ilan Solot, emerging currency strategist at Brown Brothers Harriman.

"We are also seeing stabilisation on the Russia-Ukraine front. We think there is still some upside, though we are being a bit more selective now. There is room for several EM currencies to rally a bit more."

Optimism over India's new government also lent support, he added.

The benchmark MSCI emerging equity index rose 0.7 percent, outperforming its developing market counterpart.

Indian stocks rose 0.6 percent and the rupee gained 0.4 percent to 58.47 after officials said the finance ministry is working on a proposal for the new government to cut welfare spending and rein in the deficit in its first budget.

The rouble was steady at 34.32. It hit a four-month high of 34.24 earlier, as Russian exporters converted foreign currency into roubles to pay taxes.

Debt insurance costs for Russia eased by 2 basis points to 206 bps, according to Markit.

The Turkish lira rose 0.1 percent while local stocks gained half a percent. Turkey's 2-year benchmark bond yield slipped to 9.00 percent from a close of 9.10 percent on Wednesday.

All but two economists in a Reuters poll predicted Turkey's central bank would keep its one-week repo rate unchanged at 10 percent at 1100 GMT after its meeting.

"If the Turkish central bank keeps rates unchanged and does not signal any easing in its liquidity stance, then rates at the short end of the yield curve will likely move slightly higher," TEB said.

"But this will be unlikely to reverse the expectations over policy easing in the upcoming period completely, with the anticipation of ECB (European Central Bank) easing."

The South African rand was slightly higher at 10.3370 per dollar ahead of a central bank rate decision which is also expected to deliver no changes.

(Additional reporting by Sujata Rao and Dasha Afanasieva; Editing by Larry King)

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