EM stocks, currencies firm up ahead of US Fed outcome

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LONDON (June 19): Emerging market stocks rose on Wednesday, while developing world currencies broadly firmed against the dollar as investors counted on the US Federal Reserve's outlook later today to match their expectations of lowering US borrowing costs.

Following European Central Bank President Mario Draghi's dovish comments on Tuesday which dented the euro and boosted emerging market carry trades' allure, developing world investors are now keen to see how dovish the Fed will be. Markets have largely priced in a US rate cut in July.

Sentiment was also aided by US President Donald Trump on Tuesday saying he would meet Chinese President Xi Jinping at the G20 summit later this month. There is broad scepticism, however, among investors as to whether the two world leaders can plaster over the deep fissures in their countries' trade ties.

"The Fed's really going to have to stress and really define the words 'patience' and 'caution' as markets are very on edge at the moment and they will take anything that comes out of Fed officials' mouths as gospel," said Monex Europe FX Analyst Simon Harvey.

"They have to be very clear and sing from the same hymn sheet or all it's going to do is increase speculation and market volatility, making their job even harder."

MSCI's developing world stocks index rose 1.4%, hitting a more than one-month peak. Stocks in China gained 1%, while Chinese blue-chips tacked on 1.3% on optimism of easing US-China tensions and local stimulus.

Hong Kong-traded stocks gained 2.6%. Trade-sensitive Taiwanese equities added 2%, while their South Korean peers rose 1.2%.

MSCI's emerging market currencies index gained 0.3%. China's yuan gained on US-China trade optimism.

Russia's rouble firmed, while Moscow-traded stocks advanced 0.3%, aided by a 0.5% rise in the price of oil supporting energy stocks.

South Africa's rand strengthened 0.3% while equities rose 0.5%.

The rand held around 2½-week highs it hit against the euro on Tuesday, boosted by demand for carry trades which use the euro as the funding currency.

"While there are so many risks at play in South Africa, people are still happy to take that carry, regardless," said Monex Europe's Harvey.

A report said the United States is considering sanctions that could target Turkish defence firms, cutting them off from the US financial system over Ankara's purchase of a Russian defence system, weakening the lira 0.4%.

Tatha Ghose, FX and EM Analyst at Commerzbank, said: "renewed lira weakness brought back memories of last year's crisis while the uncertainty surrounding the Istanbul re-election of June 23 and potential sanctions because of Turkey's S-400 missile purchases from Russia are all weighing on business sentiment."