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Sept. 19, 2008, 6:17 p.m. EDT

Emerging markets rally on U.S. rescue-plan hopes

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By Polya Lesova, MarketWatch

NEW YORK (MarketWatch) -- Emerging-market stocks rallied around the world Friday, buoyed by hopes that the U.S. government will hammer out a broad-ranging plan to stem the global financial crisis.

Emerging equity markets in Asia, Europe, Latin America, the Middle East and Africa posted strong gains.

The iShares MSCI Emerging Markets Fund /zigman2/quotes/201454250/composite EEM +0.28% , which tracks the performance of the MSCI Emerging Markets index, rose 13%.

In the debt markets, the EMBI+ fell by 14 basis points to 386 basis points, some 48 basis points below the peak seen earlier in the week, according to data from RBC Capital Markets.

High-yielding, emerging-market currencies rallied against the U.S. dollar, with the Brazilian real, the South African rand and the Turkish lira leading the gains.

On Wall Street, U.S. stocks surged, with the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.13% soaring nearly 400 points, boosted by the Treasury and Federal Reserve's rescue plan for the U.S. financial sector as well as regulators' move against short sellers. See Market Snapshot.

"The magnitude of the reaction is in part due to the fact that the functioning of the markets moved into very stressed levels over the past three days," said Nick Chamie, head of emerging markets research at RBC Capital Markets.

"There was a significant unloading of emerging markets in recent weeks," Chamie said. "It seems as if now that we're avoiding financial Armageddon, people are covering their shorts."

'This [U.S. rescue plan] undoubtedly provides some very welcome relief to the global financial markets.'

Lars Christensen, Danske Bank

Stocks in all the so-called BRIC countries -- Brazil, Russia, India and China -- skyrocketed, with Russian markets leading the gains. In Moscow, the Micex index leaped 29% and the RTS index rallied 22%. See full story on Russia.

In China, the Shanghai Composite soared 9.5%, leading gains in Asian markets. India's Sensex stock index surged 5.5%. Read more.

In Brazil, the Bovespa stock index rallied 10%.

"This [U.S. rescue plan] undoubtedly provides some very welcome relief to the global financial markets," said Lars Christensen, chief analyst at Danske Bank.

"We see the biggest beneficiaries to be the most "leveraged" and high-beta emerging markets such as Turkey, Brazil, South Africa, Hungary, Romania and Iceland," he said in a research note.

Elsewhere around the world, Turkey's IMKB-100 index soared 13%, South Africa's All Share index rose 5.4% and the Czech Republic's PX index rallied 12%.

In Latin America, Argentina's Merval stock index rose 10% and Mexico's IPC index gained 5%.

Can the markets sustain a rebound?

Despite Friday's rebound, emerging equity markets remain sharply lower year-to-date. The MSCI Emerging Markets index has fallen 38% this year.

Among the BRICs, China's Shanghai Composite is down 60%, Russia's RTS index is down 43%, India's Sensex is down 31% and Brazil's Bovespa is down 19%.

"Our view is that on a trend basis -- multi-week, multi-month -- that emerging markets are in for a period for underperformance versus the G7 markets," Chamie said. "Their best days are behind them. The emerging markets are going to face ongoing cyclical pressures."

Among these pressures will be the deterioration in global growth prospects and ongoing downward pressure on commodities prices.

Christensen of Danske Bank said: "Looking further ahead we are still very much in a de-leveraging 'mode' in the global economy and we certainly do not believe that everything is now fine and well."

"The fact remains that a number of emerging markets have become far too leveraged in recent years and that these countries are likely to go through quite a long period of de-leveraging."

Christensen is keeping his relatively bearish growth and market outlook for the countries with large external imbalances, such as Turkey, South Africa, the Baltic countries, Bulgaria, Romania and Hungary.

"However, for now risk appetite is back -- the question is for how long?" Christensen said.

US : U.S.: NYSE Arca
$ 39.39
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Volume: 15.85M
Dec. 9, 2022 11:58a
US : Dow Jones Global
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Volume: 0.00
Dec. 9, 2022 11:58a

Polya Lesova is a New York-based reporter for MarketWatch.

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