Soothing sounds from the U.S. Fed restart emerging market rally

By Marc Jones

LONDON (Reuters) - Emerging market stocks climbed to a four-month high and currencies from Malaysia to Mexico jumped on Wednesday, as soothing noises from the head of the U.S. Federal Reserve helped extend a two-month rally in EM assets.

In her first comments since the Fed decided to hold rates steady two weeks ago, Janet Yellen said inflation has not yet proven durable against the backdrop of looming global risks, including still-low oil prices and concerns over China.

It was interpreted as a signal that any further Fed hikes this year would be minimal and it delivered a fresh boost to emerging market assets that have taken a breather over the last week having been on a surge since late January.

MSCI's benchmark 23-country EM stocks index climbed over 2 percent to chalk up its best day in over two weeks and reach its highest level since late November.

Most of the major developing economy currencies also gained as the dollar fell back. Malaysia's ringgit jumped to its highest level in more than seven months, while South Korea's won and Mexico's peso hit four- and three-month highs.

"It is really a broad market move," said Barclays emerging market strategist Aropp Chatterjee.

"We continue to expect the Fed to continue to tighten policy later this year, but at least for the time being the market has taken some of those hikes off the table and that has given some room for EM assets to perform."

A rebound in oil prices also helped EM producer countries. Russia's rouble was 1.3 percent stronger against the dollar at 67.4517 and up 0.6 percent at 76.50 versus the euro.

Russian share indexes mirrored the move, with the dollar-denominated RTS index up 2.75 percent to 866.6 points and the rouble-based peer MICEX 0.6 percent higher at 1,855 points.

Global investors have tiptoed back into emerging assets over the past six weeks at least partly on hopes that the gut-wrenching New Year shakeout in January may have been a final capitulation after three years of woeful performance.

South Africa's rand hit a 3-1/2 month high on Wednesday as it continued to fend off concerns about its political stability and nerves the country could lose its investment grade credit rating.

Government bonds and stocks there also firmed, with the yield for the benchmark government bond due in 2026 dropping to 9.17 percent and the Top-40 stock index up 1.26 percent.

Locally, however, focus remained on whether finance minister Pravin Gordhan would answer questions from the elite 'Hawks' police unit about a suspected spy division established while he was head of the South African Revenue Service (SARS).

Another risk was South Africa's Constitutional Court ruling on Thursday on whether President Jakob Zuma should pay back some of the 240 million rand ($16 million) spent by the state on renovating his private Nkandla home.

(Reporting by Marc Jones; Editing by Richard Balmforth)