EM-Rebound; SA rand before tariff decision

Emerging market stocks and currencies recovered from recent falls on Thursday on optimism about the second-quarter earnings season, as the South African rand rose 0.4% ahead of a central bank meeting.

The MSCI Emerging Markets (EM) Equity Index jumped 1% and was heading for its best day since early June. The index had lost as much as 2.6% this week, before stopping its fall on Wednesday night.


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Improving sentiment during the second quarter earnings season has helped investors move past possible economic turmoil caused by an increase in global Covid-19 cases, fears of which had caused massive sales in recent sessions .

The MSCI Currency Index jumped 0.3% and was set for its best day in nearly a month, with most emerging market currencies benefiting from a decline in the dollar and other safe havens.

The South African rand led the gains on currencies from Europe, Middle East and Africa (EMEA).

The central bank is largely expected to keep interest rates at an all-time high of 3.5%, with the economy still under pressure from the pandemic and recent violence.

“Inflation data does not provide the Monetary Policy Committee (MPC) with a single reason to advance policy normalization, especially in light of recent events (Covid-related restrictions and Zuma riots) which represent marginal downside risk to economic recovery, ”Credit Suisse analysts wrote in a note.

“We expect the MPC to leave the policy rate unchanged at 3.50%, but hint at the start of a political normalization cycle closer to the end of the year.”

One-month dollar options on the rand have also hit recent highs, indicating that market expectations for a policy change were largely nil.

The economic blow from the pandemic had prompted most central banks in emerging markets to cut interest rates to support growth. But with the resumption of vaccinations and the reopening of more savings, several banks have started hiking cycles.

In Central Europe, the Hungarian forint rose slightly against the euro after Central Bank Deputy Governor Barnabas Virag said the bank would continue its rate hike cycle until inflation returns close to its political target of 3%.

The Hungarian central bank was the first bank in the European Union to launch a rate hike cycle this year, amid rising inflation.

Investors were also watching for economic signals from a European Central Bank meeting scheduled for later today.

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