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Prospects Daily: ​Asian currencies gain, Spain's trade deficit plunges, India raises key benchmark rate

Financial Markets… Developing-country stocks fell slightly from yesterday’s 4-month high, as bank shares in India and Turkey dropped the most in more than two weeks. The MSCI Emerging Market Index slid 0.4%, pairing this week’s advance to 3.2%, after the benchmark stock indexes for Indian and Turkish banks slumped 4.2% and 4.2%, respectively, trimming their double-digits weekly gains. The slight bump in developing-country shares also indicated that there were some profit takings on the initial rally in the wake the Federal Reserve’s surprising move.

Asian currencies posted the largest weekly gain in a year after the Fed’s unexpected refrain from tapering stimulus program boosted demand for developing-country assets. The rally was led by Malaysian ringgit, which advanced 4% versus the dollar this week to 3.1650, posting the steepest weekly appreciation since September 1998. The Thai baht gained 2.9% to 30.96 this week, while the Indonesian rupiah appreciated 0.5% to 11,350.

Foreign investors poured a record high 37.1 billion baht ($1.2 billion) into Thai bonds on Friday as growing risk-on sentiment led to a surge in capital inflows to emerging-market bonds and stocks. The yield on the country’s government securities due in June 2023 slid 37 basis points to 4.01% this week, the largest decline since August 2011. Moreover, international investors bought $494 million more stocks than they sold for the first four days of the week in Indonesia, the Philippines and Thailand.

High Income Economies… Compared to July 2012, Spain's trade deficit plunged by 53.5% (y/y) in July, resulting in a deficit of EUR786.7 million.  Driven by increases in exports of chemical products, iron & steel, export of goods increased 1.3% (y/y) to EUR19.86 billion, the highest level since records began.  Exports to the non-Eurozone destinations advanced 8.2% (y/y), while dispatches to the Eurozone decreased by 4.7%.  Meanwhile, imports decreased by 3% (y/y) to EUR20.65 billion.

The U.K. budget deficit, as measured by public sector net borrowing, excluding temporary effects of financial interventions, narrowed slightly more than expected in August to £13.2 billion, £1.3 billion lower than the £14.4 billion borrowing seen in August 2012.  The decline was driven by a 2.2% (y/y) fall in government spending, while receipts rose only 1.4% (y/y).  At the end of August, public sector net debt amounted to £1.19 trillion, equivalent to 74.6% of GDP.

Month-on-month, Italian industrial orders edged down a seasonally adjusted 0.7% (m/m sa) in July, after falling 2.5% in June.  On a three-monthly annualized basis, industrial orders actually grew 9.37% (3m/3m saar) in July, compared to 9.52% in June.  With a 21.1% year-on-year decrease, manufacturers of transport equipment recorded the biggest fall in demand.  Meanwhile, orders of textiles, clothing, leather and accessories increased 10.8%, marking the biggest increase. New orders in the domestic market declined 5.4% (y/y), which was partially offset by a 1.8% rise in demand in the export market.

Developing Economies… East Asia and Pacific: Philippines’s balance of payments improved sharply in the second quarter of 2013, with a surplus totaling US$1bn compared with a surplus of US$73 million in the same quarter a year ago.  This improvement resulted from an increase in the current account surplus, which rose 9.1% to US$2.5bn in the second quarter and net inflows of US$127 million in the financial account, which reversed the US$722 million net outflows recorded in the second quarter the previous year.

Data also show that Philippines’s external debt declined sharply in June, falling by US$1bn to US$58bn, owing mainly to net repayments of loans but also reflecting negative foreign exchange revaluation adjustments, especially as the US dollar strengthened against the Japanese yen.

Middle East and North Africa: Egypt’s central bank cut for the second consecutive time its key benchmark interest rate, the overnight deposit rate, by 50 bps to 8.75% with the aim to boost economic growth.

South Asia: India’s central bank raised its key benchmark rate, the repo rate, by 25bps to 7.5% in an effort to contain inflationary pressures; and the reverse repo, the rate at which the central bank accepts deposits from banks, was adjusted to 6.50% from 6.25%.   At the same time, it lowered the marginal standing facility, the rate at which banks can borrow funds overnight from the central bank, by 75 bps to 9.5%; and reduced the minimum daily cash reserve ratio banks are required to keep with the central bank to 95% from 99%, while the cash reserve ratio was left unchanged at 4%.