EM stocks rise to five-day highs, shrug off Italy concerns

LONDON: Emerging market equities hit five-day highs on Tuesday, with the Moscow bourse at fresh peaks as investors shrugged off the results of Italy's referendum, while a weaker dollar helped currencies such as the rand and the lira make gains.

Italian Prime Minister Matteo Renzi said he would resign after the weekend's referendum, which saw voters reject his plans for constitutional reform, initially stoking fears about political stability and Italy's banking system.

But financial markets recovered on Tuesday with the benchmark emerging equities index up 0.8 percent and set for its best performance in a week, helped by strong gains from emerging Europe to Asia.

"The Italy concern was maybe too much priced in, so we saw a reversal," said Jakob Christensen, head of emerging markets research at Danske Bank. "The fear that we may have seen a meltdown in Italy, which could hit global risk sentiment, is waning with the expectation that we will get a new government of some sort."

He added that markets were also eyeing Thursday's European Central Bank meeting, to see if it will extend its bond-buying programme by six months. "That would be positive for emerging market currencies," he said.

Moscow shares outperformed, up 0.9 percent at record highs. Russian central bank first deputy governor Ksenia Yudayeva said Russia's economy was recovering and would return to growth in the first quarter of 2017.

Polish stocks rose 1.1 percent, extending Monday's 3.5 percent gains to a three-month high after Poland dodged a credit downgrade to junk status from S&P Global on Friday. Turkish stocks rallied 1.4 percent and Prague shares rose 0.9 percent.

Earlier in Asia, South Korean stocks closed up 1.35 percent at two-week highs. Scandal-hit President Park Geun-hye said she would accept the result of an impeachment vote this week.

Taiwan stocks rose almost 1 percent and Hong Kong shares climbed 0.75 percent on the second day of the Shenzhen-Hong Kong stocks link.

But Chinese mainland stocks fell further in the wake of scathing comments by a securities regulator about "barbaric" takeovers.

With the dollar holding near a three-week low against a basket of currencies, some emerging market currencies made some headway.

The South African rand firmed 0.7 percent although third-quarter economic growth was below forecast at 0.2 percent.

"Today's data highlight that the South African economy remains extremely weak," John Ashbourne, Africa economist at Capital Economics, said in a note, suggesting interest rates will be left unchanged rather than hiked.

Christensen said the rand could still be benefiting from the fact that ratings agency S&P Global held off downgrading South Africa's sovereign debt to junk on Friday. "Half the market thought they would lose its investment grade rating, so that is giving the currency some tailwind. But that's not to say they are off the hook."

The Turkish lira also strengthened 0.3 percent from recent record lows, although the central bank warned that currency weakness could drive up prices and push the bank off its targets in the first quarter of next year.

China's yuan hit a near three-week high as the central bank set its daily guidance rate firmer than some investors had expected.

The Polish zloty and Hungarian forint weakened a touch against the euro. Hungary's economic growth slowed to an annual 2.2 percent in the third quarter, but this was better than a 2 percent first estimate.