(Adds fund flows; UK election impact on central Europe)
By Sujata Rao
LONDON, June 9 (Reuters) - Emerging stocks inched to new two-year highs on Friday and were set to end the week in the black, but Qatar’s riyal fell further in the offshore forwards markets after a rollercoaster week that saw its stocks lose 7 percent.
Overall emerging markets were kept in check by a firmer dollar and weaker Chinese factory gate prices that again cast doubts on economic growth, but MSCI’s emerging equity index rose 0.2 percent for a 0.6 percent increase this week.
Qatari stocks stabilised on Thursday after sharp falls, but pressure on its currency and bonds showed little sign of abating, with one-year dollar/riyal forwards hitting the lowest since December 2015 in offshore trade.
The riyal has traded as low as 3.7 per dollar in onshore forwards markets, Thomson Reuters data shows, a record low, and some 1.6 percent below its spot pegged rate.
“There is a bit of a spike but Qatar has plenty of reserves to fight the attack on the currency, so we don’t think a de-peg is on the cards,” Societe Generale strategist Regis Chatellier said. He ruled out defaults despite pressure on Qatari bonds.
Sovereign credit default swaps (CDS) also rose to a new seven-month high of 101 basis points (bps), almost double week-ago levels, according to IHS Markit.
Saudi CDS touched their highest since February, indicating some spill over to the rest of the Gulf but this also is not expected to be serious.
“Obviously this is not a positive story for ... any of the other countries ... it has a negative impact on the image of GCC (Gulf Cooperation Council) as one unit and it makes it potentially more difficult to implement reforms overall,” MUFG strategist Trieu Pham said. He noted the GCC plan to implement a value-added tax from next year.
But a positive global backdrop would limit the fall out, he said. “We see that even Qatar (assets) has not gone through the roof. At this point everything looks controllable so I don’t see it spilling out (of the Middle East).”
Broader emerging markets, however, are in good shape and inflows to emerging debt funds topped $2.3 billion in the past week - the 19th straight week of inflows. Emerging equity funds took in $1.2 billion, Bank of America Merrill Lynch data showed.
Elsewhere, the Czech crown jumped 0.4 percent to a new three-year high versus the euro, with higher-than-expected May inflation data pointing to possible monetary tightening later this year, and contrasting with the European Central Bank’s (ECB‘s) dovish stance .
Czech bond yields rose across the curve, with five-year yields hitting 10-day highs.
There was little impact on emerging markets from the British election but Rabobank advised positioning for central European currencies to firm against the weaker pound.
“The Czech crown has the biggest potential amongst its peers to appreciate against sterling. Even if the political situation stabilises ... downside pressure on sterling/crown is likely to prevail over the mid-term horizon given that the outlook for the Czech economy is relatively positive,” Rabobank told clients.
Elsewhere, investors are carefully watching developments in Venezuela, which missed a $30 million interest payment to the CAF development bank, the development bank of Latin America, days after missing a $1 billion repayment to Russia.
The Ivory Coast, meanwhile, issued the first euro-denominated bond sold by any sub-Saharan African country besides South Africa.
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Emerging Markets Prices from Reuters Equities Latest Net Chg % Chg % Chg
Morgan Stanley Emrg Mkt Indx 1020.61 +1.55 +0.15 +18.36
Czech Rep 1010.07 +3.85 +0.38 +9.60
Poland 2344.45 +4.22 +0.18 +20.36
Hungary 35255.12 -15.83 -0.04 +10.16
Romania 8550.16 -123.40 -1.42 +20.68
Greece 780.35 +1.30 +0.17 +21.24
Russia 1043.84 +5.34 +0.51 -9.41
South Africa 45725.04 -8.74 -0.02 +4.15
Turkey 98894.96 +917.42 +0.94 +26.56
China 3158.75 +8.41 +0.27 +1.78
India 31217.71 +4.35 +0.01 +17.24
Currencies Latest Prev Local Local
close currency currency
% change % change
Czech Rep 26.23 26.28 +0.21 +2.97
Poland 4.19 4.20 +0.23 +5.19
Hungary 307.55 307.68 +0.04 +0.41
Romania 4.56 4.56 +0.12 -0.50
Serbia 122.50 122.55 +0.04 +0.69
Russia 56.97 56.88 -0.15 +7.54
Kazakhstan 315.68 314.22 -0.46 +5.69
Ukraine 26.13 26.12 -0.06 +3.33
South Africa 12.93 12.90 -0.20 +6.22
Kenya 103.15 103.35 +0.19 -0.76
Israel 3.53 3.52 -0.15 +9.07
Turkey 3.52 3.52 +0.02 +0.12
China 6.80 6.80 +0.03 +2.15
India 64.33 64.24 -0.14 +5.62
Brazil 3.26 3.26 -0.00 -0.23
Mexico 18.23 18.20 -0.16 +13.64
Debt Index Strip Spd Chg %Rtn Index
Sov‘gn Debt EMBIG 318 0 .04 7 90.78 1
All data taken from Reuters at 0932 GMT. Currency percent change calculated from the daily U.S. close at 2130 GMT. (Additional reporting by Claire Milhench; Editing by Louise Ireland and Mark Potter)