Korea Leads Emerging Market Rebound With Iran Driving Volatility

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(Bloomberg) — The best day on South Korea’s stock market in nearly two decades is leading a recovery in emerging-market equities as signals that Iran may be ready to reduce tensions in its six-day war with the US and Israel boosted riskier assets.

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MSCI Inc.’s developing-nation equities rose 2.4% by 11:09 a.m. in London, with Seoul-listed companies jumping 9.6% — the most since October 2008. That still left the EM stock gauge down more than 6% on the week, as the war in Iran dented the past year’s exuberance in emerging markets.

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News reports about Iran making overtures toward the US on resolving the conflict are improving risk sentiment and steering global markets away from high-risk scenarios that would keep demand for EM assets capped for longer. A report on Thursday saying that Iran had signaled it was ready to relinquish its uranium stockpiles initially lifted markets but the moves faded in the absence of any quick signals from Washington.

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“Trading remains very much headline-based in the current circumstances,” analysts at KBC Group including Mathias Van der Jeugt wrote in a note. They also pointed to an Iranian comment saying the Strait of Hormuz remained open, boding well for keeping the world stocked with oil and gas from the Middle East.

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The index for currency returns was 0.2% higher, with the Indian rupee boosted by central bank interventions. The units of oil-importing nations lagged, with the South African rand, Thai baht and Hungary’s forint weakening the most. The volatility of EM currencies spiked above those of developing-market peers for the first time since May, breaking the longest such stretch on record.

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African dollar bonds extended a recovery as investors bet some of the region’s borrowers will benefit from elevated oil and metal prices. The premium of African dollar bonds over US Treasuries narrowed about seven basis points to 339, according to indicative pricing for JPMorgan Chase & Co. indexes. The spread is tightening for a second day after jumping the most since October on Tuesday.

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In monetary policy, Malaysia kept its benchmark interest rate unchanged as it warned that downside risks have risen from the deepening conflict in the Middle East.

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Poland’s central bank governor is set to speak later in the session. The bank resumed interest rate cuts on Wednesday after a two-month pause in a sign that policymakers see domestic inflation pressures staying subdued despite rising global energy costs due to the war in Iran. 

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—With assistance from Ray Ndlovu.

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