Emerging assets continued their recent recovery trend on Tuesday, with stocks rising to a two-week high, but gains were relatively subdued ahead of the U.S. presidential election.
After death-defying falls in recent weeks, emerging stocks staged their sharpest rise on record last week, buoyed by global rate cuts, Federal Reserve currency swap lines for four emerging economies and promises of IMF help for several countries.
"Sentiment seems to be on the mend — it is a bumpy road but there is a feeling we could be in a normalisation process, given interbank rates are progressively easing from exaggerated levels," said Elisabeth Gruie, emerging markets strategist at BNP Paribas.
"Several measures of risk are indicating some improvement — equity volatility is going down, credit default swaps markets are consolidating, but there is the caveat of thin liquidity." Democrat Barack Obama is expected to win the U.S. presidential election against Republican candidate John McCain later on Tuesday. The first polls begin to close at 2300 GMT, and voting ends over the following six hours.
Democrats are also heading towards winning possibly their biggest majorities in the U.S. Congress in decades, and Obama has proposed an economic stimulus plan that some experts estimate could cost as much as $190 billion.
"The possibility that the Democrats…could gain a filibuster-proof super-majority of 60 seats cannot be ruled out," said Alistair Newton, senior political analyst at Nomura, in a client note, adding that this "should ensure that an Obama administration would have a good probability of securing Congressional support for its legislation without undue haggling".
Benchmark emerging equities rose 0.85 percent to 589.35, their highest since Oct 21 and extending their rally to 32 percent from four-year lows hit last week.
Emerging sovereign debt spreads tightened by 29 basis points to 584 bps over U.S. Treasuries, levels last seen in mid-October.
Spreads ballooned above 900 bps to their widest in six years last month, but have snapped back in following the global rate cuts and IMF packages.
SWAPS EASE
Credit default swaps, used to insure against restructuring or default of debt, have eased from distressed levels.
Russia's five-year CDS closed on Monday at 547.8 basis points mid-price, according to specialist CDS monitor CMA Datavision, after rising as far as 1,000 bps only two weeks ago. Russian markets were closed on Monday and Tuesday.
Ukraine's CDS have fallen back below 2,000 bps to 1,850, after approaching levels near 3,000, while Kazakhstan is trading around 695, at nearly half recent record levels.
Central European currencies held within recent ranges, after the European Commission cut its growth forecasts for the EU on Monday.
"Markets are calm now but macro news going forward for most emerging markets, especially for central and eastern Europe, will be terrifying," said Lars Christensen, head of emerging markets research at Danske in Copenhagen.
"Many countries in the region will have negative growth next year — it's not over in terms of turmoil for emerging markets."
FROZEN ICELANDIC CROWN
In Iceland, the crown continues to be virtually untraded in international markets, with the last trade on Reuters matching dealing system on Oct 30, at 200 per euro.
However, the few trades that have taken place in international markets have shown a strengthening in the crown from levels around 275.
Meanwhile, the crown is being fixed at a gradually weaker rate in the domestic market, at 164 on Tuesday from the first fixing at 150 in mid-October.
Eurogroup chairman Jean-Claude Juncker said on Tuesday the European Union had to provide support and help to Iceland, while Norway said on Monday it would give Iceland a 500 million euro loan and was willing to act as mediator in a row with Britain sparked by the meltdown of Iceland's banks.
Iceland has reached a tentative deal with the IMF for a $2 billion loan and has been talking to other potential lenders including Russia and the EU.
The first stage of an auction to settle credit default swaps on the senior debt of Icelandic bank Landsbanki set a preliminary price of 3.375 percent of notional value on Tuesday.
Sellers of CDS in Iceland's three major banks will have to pay out more than $7 billion in the wake of the country's financial crisis.
