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Emerging markets rebound as investors wait for Fed

London - Emerging markets rebounded, with currencies advancing after their biggest decline in two months, as investors awaited clues on the timing of a US interest-rate increase from a speech by Federal Reserve Chair Janet Yellen.

South Africa’s rand advanced after President Jacob Zuma said he had "full confidence" in Finance Minister Pravin Gordhan, following speculation the Treasury chief would be replaced that sent the currency to a four-week low.

Swings in exchange rates this week have sent volatility for developing-nation currencies to the highest in almost two months. Equities staged a comeback, with benchmarks for Turkey and Taiwan advancing more than 0.7%.

The extra yield investors demand to hold emerging-market debt instead of Treasuries was little changed near a one-year low.

Emerging markets clawed back some of this week’s losses, triggered by political and security flare-ups in South Africa, Turkey and Korea as well as speculation the US is moving closer to raising rates.

Developing-nation assets have benefited this year as near-zero rates in major economies drive investors toward higher-yielding assets.

"Investors are adjusting their positions ahead of Yellen’s speech," said Christopher Shiells, a senior emerging-markets analyst at Informa Global Markets, who recommends buying the Polish zloty and selling the rand.

"There is a growing sense that once Yellen is out of the way, and as long as she doesn’t turn hawkish, the great global yield hunt will continue next week."

Yellen is due to speak on Friday at a symposium in Jackson Hole, Wyoming on Friday. Fed fund futures show the odds of a hike in 2016 have climbed to 54% from 47% one week ago. There is a 28% chance of a rate increase in September, according to the measure.

The MSCI Emerging Markets Currency Index advanced 0.2% as of 1:02 p.m. in London. The MSCI Emerging Markets Index of stocks rose the same amount, climbing from the steepest drop since July 6.

The premium investors demand to hold developing-nation bonds was at 336 basis points, according to JPMorgan Chase indices.

Rand recovery

South Africa’s rand strengthened 0.6%, after tumbling 5.6% in the previous four days. The rand fell to a three-week low on Wednesday after a special police investigative unit told Gordhan to report to its offices on Thursday as part of an investigation into irregularities at the country’s tax authority.

Gordhan said he had done nothing wrong by authorizing the establishment of a special investigative unit when he headed the national tax agency and wouldn’t comply.

The presidency said in a statement on Thursday that Zuma "wishes to express his full support and confidence in the minister of finance and emphasizes the fact that the minister has not been found guilty of any wrongdoing."

The yield on rand-denominated bonds due in December 2026 dropped six basis points to 9%.

Currencies, bonds

South Korea’s won strengthened 0.6% against the greenback, recovering a loss yesterday after North Korea launched a ballistic missile test. Malaysia’s ringgit and the Russian rouble climbed more than 0.5%. Emerging-market currency volatility reached 10.24% on Wednesday, the highest since July 6, JPMorgan indexes show.

Turkish local-currency bonds rose, sending the yield down seven basis points to 9.74%, the lowest level in more than a week. The rate on similar-maturity Russian debt fell two basis points to 8.32%.

A rally that has seen emerging-market bonds post their best returns this year since 2009 has further to go as valuations and fundamentals continue to look attractive, BlackRock money manager Amer Bisat told Bloomberg Television on Wednesday.

"In a world in which core fixed income is still offering you no rates or no yield or negative yield, emerging markets stand out like a sore thumb," Bisat said. "We are still overweight emerging markets and we feel very comfortable with that position."

Stocks

The MSCI equity gauge has climbed 2.9% this month, compared with a 0.4% advance for the MSCI World Index of developed-country shares. Taiwan Semiconductor Manufacturing Company climbed 2% on Thursday, helping Taiwan’s Taiex index to the biggest gain among major emerging markets.

The Borsa Istanbul 100 Index snapped a three-day decline, rising 0.7%. Turkish stocks slumped the most in three weeks on Wednesday as the country launched its biggest military operation in Syria to keep the Islamic State group away from its border.

Russian stocks fell for a second day, sliding 0.6% after the government renewed calls to boost taxes on energy companies to narrow its budget shortfall.

The Shanghai Composite Index retreated 0.6% on concern the government will act to cool speculative activity in the nation’s financial markets.

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