Chinese central bank support boosts EM stocks; FX gain as dollar rally fades

July 18 (Reuters) – Emerging market shares rose nearly 2% on Monday, buoyed by Chinese central bank support pledges that sent the country’s mainland stocks leaping, while currencies saw modest gains as the greenback relaxed from multi-year highs.

China’s central bank stepped up cash injections by offering 12 billion yuan ($1.8 billion), while also vowing to increase implementation of prudent monetary policy to support the economy. Heavyweight stocks added more than 1% and Hong Kong’s Hang Seng index leaped 2.6%.

China’s yuan firmed 0.2%, its biggest jump in nearly a month.

“Investments in China – both direct investment and portfolio investments – are under pressure due to factors that were perceived as less relevant in the past,” said Ulrich Leuchtmann, head of FX and commodity research at Commerzbank.

“Free-flowing export revenue is supporting CNY, but if that eases, or when the West slides into a recession, the renminbi is likely to get under increasing pressure.”

MSCI’s index of emerging market (EM) stocks jumped 1.7% after dropping nearly 4% last week as worries over a looming downturn, China’s economic strains and faster U.S. interest rate hikes dented the appeal for riskier assets.

“It is unclear what the ‘new normal’ will look like following this inflation shock,” Leuchtmann added.

With U.S. Federal Reserve officials signalling a 75-basis-point rate hike at the upcoming meeting, rather than the 100 bps some feared, risk sentiment improved, and the safe-haven dollar nudged down to 107.86 from last week’s two-decade high of 109.290.

After selling off for six straight weeks, emerging market currencies got a breather, rising 0.3% with Mexico’s peso and South Africa’s rand rising upto 0.8%.

Russia’s rouble hit a near two-week high against the dollar, supported by a favorable tax payment period and capital controls as participants look ahead to a central bank rate decision this week where it is widely expected to cut the key rate from 9.5%.

Sri Lanka President Wickremesinghe declared a state of emergency in the country, according to a government notice.

Sovereign dollar bonds dipped up to 0.5 cents, after dropping to record lows last week.

At large, crashing currencies, 1,000 basis point bond spreads and burned forex reserves point to a record number of developing nations now in trouble.

Emerging market local currency bond funds suffered their 20th consecutive week of outflows last week in the longest streak since 2014, according to analysts at JPMorgan.

(Reporting by Anisha Sircar in Bengaluru; Editing by Rashmi Aich)