EM stocks hit two-year high, currencies gain amid rate cut bets

Emerging-market stocks hit another two-year high and currencies gained as risk appetite stayed strong thanks to stronger bets on monetary easing across core and developing economies.

MSCI Inc.’s EM equities gauge rose 1% to the strongest intraday level since April 2022 in morning trade in London, with an index of developing currencies adding 0.1% against the dollar.

The dollar also fell against most major currencies ahead of US inflation data Thursday that might raise the chance of Federal Reserve interest-rate cuts. Releases in several emerging markets this week showed softer price growth.

“Risk sentiment has improved into today’s US June CPI report, perhaps as markets expect the figures to keep the Federal Reserve on track for a September rate cut,” ING Bank analyst Francesco Pesole wrote in a note.

Romanian inflation slowed to the lowest pace since 2021, data showed Thursday, boosting scope for the central bank to press ahead with monetary easing after the first rate cut in three years. While Romania has kept the closely managed leu steady, the Czech koruna and the Hungarian forint each took hits earlier this week after their respective inflation readings.

Managing those expectations, Czech Vice Governor Eva Zamrazilova said the slower-than-expected June inflation showed room for more Czech monetary policy easing, but the central bank will make no steep rate cuts. 

“We expect the board to slow the pace of cuts to 25 basis points in August, considering that EUR-CZK is weaker than the CNB’s assumption,” UniCredit analysts wrote in a note. “Based on the dovish shift in the CNB’s outlook, EUR-CZK may continue to drift higher in the coming days, but we expect still-cautious comments from CNB board members to prevent a break above the EUR-CZK YTD high of 25.50.”

Serbia was also heading into a rate decision on Thursday. The central bank in Belgrade will keep the one-week repurchase rate at 6.25%, according to eight out of 14 analysts in a Bloomberg survey. The remaining six anticipate a second reduction of 25 basis points in as many months. 

In Asia, China took some of its most extreme steps yet to restrict short selling and quantitative trading strategies, seeking to support the nation’s sliding stock market. At the same time, the financial regulator asked some rural lenders to shorten the average duration of their bond holdings, according to people familiar with the matter, as authorities seek to safeguard the banking sector amid a relentless rally in the debt market.

Elsewhere, Malaysia’s central bank kept its benchmark interest rate unchanged on Thursday, giving itself room to weigh the impact of potential price hikes as the government unwinds blanket fuel subsidies.