Emerging Stocks Close at Over Two-Year High on Boosted Risk Mood

(Bloomberg) -- Emerging-market stocks rose to their highest in two and a half years, after China delivered an economic stimulus package and an unexpected drop in US consumer confidence stoked bets of another big interest rate cut by the Federal Reserve. 

The MSCI equity index for emerging economies closed the day with an 1.9% advance, extending its gains to a fourth day. A gauge for developing market currencies gained 0.2%, with the currencies of Brazil and Chile rising the most on the prospect that Chinese growth will support prices for Latin America’s commodity exports.

The Conference Board’s gauge of US sentiment posted the biggest drop since August 2021 while a manufacturing reading also slowed, data showed. The data fanned expectations that the Fed could deliver another half-point percentage cut this year, which will support demand for higher-yielding assets, said Christian Lawrence, a cross-asset strategist at Cooperatieve Rabobank.

“We have broad-based US economic weakness made worse by the data, and the drop in yields, but there is also the story of commodity currency strength driven by Chinese stimulus,” Lawrence said.

Earlier Tuesday, appetite for riskier assets improved after China announced an array of measures to address concerns over slowing growth, including steps to ease monetary conditions and provide liquidity support for stocks.  

Meanwhile, Mexican inflation cooled more than expected in early September, pushing dowin interest rate swaps as traders increased the probability that the Banco de Mexico could match the pace of the Fed with a 50-basis point cut this Thursday. Most economists expect a 25-point cut, but the inflation data gives policymakers room for a half-point cut, said Marco Oviedo, a strategist at XP Investimentos

“Shocks are fading. Inflation should continue coming down,” Oviedo said. “The Fed did fifty, Banxico should follow.”

In Hungary, policymakers lowered the key interest rate by a quarter-point to 6.5% as slowing inflation and interest-rate cuts by major global central banks widened policymakers’ room for maneuver. The forint briefly pared gains as policymakers said more cuts were in store. 

In credit markets, Nigeria’s dollar bonds were among the top gainers after the country’s central bank surprised financial markets by raising borrowing costs to a fresh record high to quell inflation. Turkey has mandated banks for the issuance of a 10-year dollar-denominated bond, which will be switched for existing shorter-term notes to ease immediate repayment pressures.

New Sri Lankan president Anura Kumara Dissanayake dissolved the nation’s parliament with effect midnight Tuesday and called for early elections, framing his decision as steps toward combating corruption and renegotiating a $3 billion bailout from the International Monetary Fund. 

--With assistance from Zijia Song.

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