South African local bond yields shot to three-year peaks and the currency firmed to a one-week high on Friday after hawkish central bank comments, the moves coming against a generally calmer emerging markets backdrop.
Bonds and stocks across emerging markets rose ahead of a key US employment report while the high-beta Turkish lira also rebounded to a one-week high against the dollar.
The rand hit a one-week high around 7.03 per dollar as central bank chairman Tito Mboweni cemented the case for an interest rate rise this month and signalled of more to come.
Mboweni said the National Credit Act, aimed at slowing credit growth, could not replace the need for monetary restraint and interest rates were the only way to control inflation. That hit local bonds hard, the most-traded issue seeing yields rise to a three-year high around 9.34 percent.
Goldman Sachs economist Ashok Bhundia said markets were starting to price in a 50 basis points rate rise by end-2007.
"It's very clear (Mboweni) is signalling that speculation that slower credit growth might result in slower interest rates hikes, that it may be a substitute for interest rate hikes, should not be a conclusion to draw," Bhundia said.
Elsewhere, the absence of any new credit-related news and a positive close on US equities on Thursday took the edge off global financial markets' recent losses caused by an unfolding crisis in the US subprime and credit sector. The iTraxx index of junk-rated credits, the barometer of European credit sentiment steadied after recent losses.
MODEST REBOUND:
The overall modest rebound helped emerging sovereign bond spreads to contract 5 basis points to 212 over US Treasuries on J. P Morgan's EMBI Plus index. Emerging equities gained 0.6 percent after losing 7 percent in the past week.
"We are effectively seeing emerging and G10 markets trade sideways. It looks like a repetition of yesterday when we had a consolidation of the majors and some incremental strengthening of the EM currencies," said Olivier Desbarres, currency strategist at Credit Suisse in London. "There's not a lot of price action because markets are cautious about adding huge chunks of risk before the payrolls."
US data, due at 1230 GMT, are expected to show 130,000 jobs were added outside the farm sector, little changed from last month. But weaker-than-expected data on Wednesday from the private sector ADP suggested fewer jobs may have been added. Investors fear an out-of-consensus result may aggravate the volatility caused by credit problems.
"US domestic demand has proved quite resilient and that's been one of the pillars of growth. If that were to go, then you have a problem for US and global growth," Desbarres said. Investors took the opportunity to add cautiously to emerging asset positions, with the Turkish lira rising a quarter percent to an eight-day high of 1.27 per dollar ahead of data that is expected to show the disinflation trend continuing.
Other emerging currencies also firmed, the Hungarian forint rising 0.35 percent to 250.28 while the zloty touched a one-week high against the euro before paring gains.
On emerging-bond markets, year-to-date returns moved back into positive territory on the EMBI Plus. Turkey's portion of the index tightened 3 bps though it underperformed peers, which experienced spread contraction of 4-5 bps in general.
Comments
Comments are closed.