Emerging market stock and bond prices rebounded strongly on Friday on global optimism over a US government plan to rescue financial markets. Despite the positive reaction, analysts were cautious about the economic outlook for emerging markets in the medium term given an expected slowdown in global growth.
Yield spreads between emerging market bonds and US Treasuries, an important gauge of investors' aversion to risk, narrowed by 66 basis points to 353, and total returns rose 1.81 percent, according to the benchmark J.P. Morgan. The MSCI emerging market stock index surged 10.23 percent, bouncing from Thursday's two-year low.
"The recent measures announced by the US Treasury and the Fed have provided the markets with some confidence that the situation might stabilise, and to that extent people are calmer. We see the rebound across all assets now," said Benito Berber, Latin America strategist at RBS in Stamford, Connecticut. US officials announced on Friday they are working on a solution to take over hundreds of billions of dollars worth of bad mortgage debt.
The government also curbed short-selling in the stock market and said it will use $50 billion to back money market mutual funds. The measures came at the close of a week that saw the bankruptcy of Lehman Brothers Holdings, the hurry-up wedding between Merrill Lynch and Bank of America, and the government bail-out of insurance giant.
Worries over a collapse of the financial system had scared investors away from risky emerging market assets. On Wednesday, the J.P. Morgan EMBI+ index reached 428 basis points, the widest since October 2004, and stock markets throughout Latin America plunged.
On Friday, the MSCI Latin America stock index soared 10.26 percent. In Brazil, the region's leading economy, stocks went up 9.28 percent. The real, Brazil's currency, posted its biggest gain since August 2002, rallying 5 percent after the central bank sold $500 million in dollar repurchase agreements to supply the market with liquidity. The real closed up 4.74 percent at 1.83 per dollar.