Emerging Markets-Rebound on Bush hopes; Turkey leads

...

Emerging equities jumped to three- week highs and sovereign bond spreads narrowed 6 basis points on Friday, tracking global stock gains on news that U.S. President George Bush will outline reforms to help subprime mortgage borrowers.

Morgan Stanley's emerging equity index rose 1.6 percent to the highest levels since Aug. 9 and now stands about 15 percent above the 4-1/2 month lows touched earlier this month . JP Morgan's benchmark index of sovereign bond spreads contracted 6 bps to 226 over U.S. Treasuries .

Most high-yield currencies also rose, corresponding to the broad decline in the yen, but trade volumes were thin as investors stuck to the sidelines before the Bush proposals and a speech by Federal Reserve Chairman Ben Bernanke.

"The catalyst for the rebound ... is expectation that in the United States there could be a programme to support distressed mortgage holders and that's given people more confidence in carry trades," said Koon Chow, emerging markets strategist at Barclays Capital in London. "Where macro fundamentals are good, it's giving those assets an additional boost."

Turkey led the gains, with the lira rising one percent to a 2-1/2 week high against the dollar and the Istanbul stock exchange gaining 2.5 percent , after the head of the powerful army sought to play down tensions with the new President Abdullah Gul, a former Islamist.

Turkish bond spreads on the EMBI Plus snapped in 9 bps to 233 bps over U.S. Treasuries while five-year protection costs, or credit default swaps, fell 9 bps to around 197-199 bps.

Turkey's benchmark 2030 bond soared one point in price with yields dropping 8 bps as markets also cheered the appointment of a pro-European Union, pro-reform cabinet.

"In Turkey what's making people happy to take on extra risk is that political life seems to be normalising, as exemplified by the relatively smooth presidential election. And the cabinet line-up is one that underscores policy continuity -- the promise of continued reform and progress towards the EU," Chow added.

But other credits also gained, with Ukrainian, Brazilian, Russian and Argentine bond spreads all tightening 5-9 bps on the EMBI Plus while CDS also rallied. Ukrainian and Russian CDS narrowed some 8-10 bps respectively.

"The tone is not too bad today as we have George Bush riding to the rescue. The pressure has been released by govvies (government bonds) coming off and there is some shortcovering ahead of the long (U.S.) weekend," a bond trader in London said.

CURRENCIES

The South African rand firmed 0.6 percent to 7.09 per dollar having earlier hit a four-week high, while local stocks jumped 1.7 percent .

The Hungarian forint rose 0.5 percent to 253.80 per euro , a two-week high and a 3.5 percent rally from the 9-1/2 month low hit on Aug. 17. Other central European currencies were mostly flat to slightly firmer versus the euro.

Dealers said investors have been unwinding short forint positions that were put on at the height of the crisis as it becomes more clear the subprime woes may not hit emerging markets' economic growth badly.

The Hungarian central bank also held interest rates at 7.75 percent this month.

"The forint has been doing well as risk appetite has returned because of the high interest rates and also because it weakened the most when subprime worries hit," said Anders Svendsen, currency strategist at Nordea in Copenhagen.

"Obviously it is the most vulnerable currency in the region but interest rates are so high they more than compensate for the risk," Svendsen said, adding he also favours zloty, which gained from a 25 bps rate rise this week and forecasts of more to come.

Elsewhere, the Israeli shekel rose 0.25 percent to stand just off the near three-month highs hit on Thursday .

[LONDON/Reuters/Finance.cz]