EMERGING MARKETS-Alibaba weighs on EM shares; Turkish lira firms after rout

The South African Reserve Bank on Thursday delivered its first rate hike in over three years. The lira firmed up to 1.7%, moving back below 11 to the dollar and snapping an eight-day losing streak during which it lost almost 12%.

Turkey's lira staged a tentative comeback on Friday, at the end of a brutal week, while emerging market stocks slipped, led by a 10% slump in e-commerce giant Alibaba after it slashed its sales outlook.

Other EM currencies also got a bit of a breather after a bruising few days marked by a strong dollar, the prospect of higher core yields as well as lira wobbles. Russia's rouble picked up from near two-month lows, while the South African rand firmed up to 0.8% before the trading flat. The South African Reserve Bank on Thursday delivered its first rate hike in over three years.

The lira firmed up to 1.7%, moving back below 11 to the dollar and snapping an eight-day losing streak during which it lost almost 12%. It hit a record low of 11.3 to the dollar on Thursday when it sank 6% after the central bank ignored rising inflation to bow to political pressure, cutting the key interest rate by 100 basis points to 15% and signaling another cut next month.

Turkish opposition leaders called for immediate early elections after the lira meltdown. Lira-implied volatility remained elevated, though dollar bonds steadied. The impact from a currency crisis in Turkey would be limited because EM currencies don't look like they are in need of a significant adjustment and as foreign investors have pared back their exposure to Turkey after years of erratic policymaking and crises, said Shilan Shah, senior economist at Capital Economics.

But there are concerns that developments in Turkey will be used as a bearish excuse for other EM assets – especially against the backdrop of the deteriorating growth differentials between EM and developed markets, according to Natalia Gurushina, EM fixed income economist at VanEck. JPMorgan turned underweight on currencies in emerging Europe, the Middle East, and Africa over the prospect of more entrenched inflation, as well as higher core bond yields in developed markets.

S&P Global and Moody's were set to review South Africa's credit rating later on Friday. "It is likely that Finance Minister Enoch Godongwana's recent (mid-term budget) is sufficient to stave off further downgrades at this juncture," RBC analysts said in a note.

EM stocks slipped 0.2% on Alibaba's drop. The company cited increased competition and a regulatory crackdown. The EM benchmark is on track for weekly losses of more than 1%. For GRAPHIC on emerging market FX performance in 2021, see http://tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance in 2021, see https://tmsnrt.rs/2OusNdX

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