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Prospects Daily: Developing country stocks hit two-week high

Global Macroeconomics Team's picture

Important developments today:

1. Developing country stocks hit two-week high on stimulus hopes

2. Euro Area unemployment rate at highest on record in May and June

Developing country stocks hit two-week high on stimulus hopes. Emerging market equities advanced for a fourth day on Tuesday, lifting the benchmark index to a two-week high, amid strong performances by Latin American and East Asian shares reflecting rising hopes of further monetary stimulus from central banks. But declines in Russia and South Africa limited the gain as some caution set in among investors during Emerging Europe trade. Emerging-market stocks have been advancing recently, taking a cue from global stocks, underpinned by anticipation that the European Central Bank could revive its bond purchase program to lower surging Italian and Spanish borrowing costs and the U.S. Federal Reserve may take additional measures to bolster economic growth. The benchmark MSCI Emerging Market Index climbed 1% in afternoon trading, gearing for its highest close since May 11, led by shares of South Korea, Taiwan, and Brazil. Benchmark gauges of these countries gained 2.1%, 1.6%, and 1.2%. In contrast, Russia’s Micex Index retreated 0.85%, snapping a four-day rally, while South Africa’s benchmark index lost 0.5%, falling from yesterday’s record high. Meanwhile, emerging-market bond spreads over comparable U.S. Treasuries tightened 2 basis points (bps) to 343 bps today, according to JPMorgan’s EMBI Global Index.

Euro Area unemployment rate at highest on record in May and June. Driven by the continuing debt crisis, a worsening credit outlook, deteriorating business and consumer confidence, and a slowdown in industrial activity, the unemployment rate in the Euro Area stood at 11.2% in both May and June, the highest on record since the series started. In a release today, the European statistical agency Eurostat said that the EU-27 unemployment rate held at 10.4% in June, the same rate as May. The unemployment rate rose in nineteen EU Member states from a year earlier, fell in seven, and remained stable in one (Sweden). In a separate release, the German Federal Labor Agency said today that the number of unemployed in the largest Eurozone economy rose for the fourth straight month to 2.89 million in July, but the adjusted unemployment rate held at 6.8%. With Euro Area manufacturing activity contracting for the sixth month in a row (according to flash estimates for Purchasers Managers Index for July) and Euro Area GDP likely to stagnate or contract in the second quarter after narrowly avoiding recession in Q1 2012, unemployment rates are likely to continue to remain close to current highs. Eurostat’s flash estimate of consumer price inflation for the Euro Area showed it holding steady at 2.4% in July, the same rate as the previous two months, suggested subdued demand pressures.

Among Emerging Markets

In East Asia and Pacific, China’s capital and financial account swung into a deficit of $71.4 bn in the second quarter of 2012 from a surplus of $56.1 bn. in Q1 2012, according to the State Administration of Foreign Exchange (SAFE). Domestic firms and residents increased their holdings of foreign currencies amid the global turbulence, but the state regulator asserted that there was “no sign yet of capital flight.” China’s current account surplus shrank further to 2.3% of GDP in the first half of 2012 from 2.7% of GDP in 2011 suggesting the economy relied less on foreign demand.

In South Asia, India’s central bank kept its benchmark repurchase rate at 8% to contain persistently high inflation, even as the global economic slowdown, weak domestic investment, and lower-than-expected monsoon rains threaten another year of slow growth. India’s GDP growth slowed sharply to 6.5% (y/y) in the last fiscal year ending in March 2012 from 8.4% the previous year, but headline inflation has remained high amid infrastructure bottlenecks, rapidly rising food prices, and a weaker rupee. The central bank lowered its growth forecast for the current fiscal year to 6.5% from 7.3% earlier. Consumer price inflation in Sri Lanka accelerated to 9.8% (y/y) in July, its highest pace in more than a year, from 9.2% in June, mainly due to drought that has resulted in shortages of rice and vegetables, and a sharp depreciation of the Sri Lankan rupee in recent months which has raised cost of imported items.

In Sub-Saharan Africa, Kenya’s consumer price inflation dropped to 7.7% (y/y) in July from 10% in June, driven by a drop in prices of food and fuel, which constitute 54% of the CPI basket, and a high base the previous year. Food prices have fallen after rains in the country, and petrol prices were revised downward in line with international crude oil prices.

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