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Oct. 27 (Bloomberg) -- Emerging-market stocks rallied, with the benchmark index posting its biggest gain in a month, as European leaders agreed to expand a bailout fund to stem the debt crisis. Currencies gained and bond yields tumbled.
The MSCI Emerging Markets Index closed 3.5 percent higher at 993.81 after approaching a bull market during intraday trading, with the benchmark index rising as much as 20 percent from an Oct. 4 low. Brazil’s Bovespa gained 3.7 percent, extending its gain to 22 percent from a bear-market low on Aug. 8. Russia’s Micex Index increased 1.7 percent as crude advanced in New York, bringing its advance since Oct. 5 to 21 percent. The Hang Seng China Enterprises Index climbed 5.1 percent, extending gains after Premier Wen Jiabao said this week the government may fine-tune its economic policies as needed.
Equities and commodities rallied after French President Nicolas Sarkozy said the euro region’s bailout fund will be leveraged by four to five times, and investors have agreed to a voluntary writedown of 50 percent on Greek debt. Sarkozy spoke with Chinese leader Hu Jintao today as Europe seeks help from the Asian nation in the bailout effort.
“It’s a full-on risk-on environment,” Benoit Anne, a London-based head of global emerging markets strategy at Societe Generale SA, said in an interview. “It’s a major breakthrough, very positive step in the right direction.”
Twenty-three of 25 emerging-market currencies tracked by Bloomberg gained today, led by a 4 percent jump in Poland’s zloty and a 3.5 percent gain for the Czech koruna.
MSCI’s developing-nation index has dropped 14 percent this year, with companies on the gauge trading at 10.6 times estimated earnings. That’s less than the four-year average multiple of 11.5 times, according to data compiled by Bloomberg. Options traders are making more bets than any time since 2009 that emerging market equities will climb after valuations fell to the lowest levels in three years.
The extra yield investors demand to own emerging-market debt over U.S. Treasuries fell 35 basis points, or 0.35 percentage point, to 362, according to JPMorgan Chase & Co.’s EMBI Global Index.
Even after today’s gains, the bonds of some of Europe’s most-indebted countries are still trading near their historical lows. Greece’s two-year yield slid 285 basis points to 76.91 percent today, compared with an average of 27 percent in the past year. Italy’s 10-year yield, which averaged 4.93 percent in the past 12 months, fell five basis points to 5.87 percent.
The MSCI Emerging Markets Index is still down 18 percent from May 2, when it reached an almost three-year high.
“The markets are buying into the sense that the EU policy makers have come up with this big bazooka of a plan,” said Neil Shearing, a London-based analyst for Capital Economics Ltd. “The plan has only dealt with the symptoms of the euro-zone problem and hasn’t dealt with the causes, which has been very weak growth in the periphery and very strong growth in the core. And it’s going to take a while for some of those issues to be worked out.”
Sarkozy will host a Group of 20 summit next week, with Europeans seeking to bolster the role of the International Monetary Fund in overcoming the euro-region’s woes. Australia’s finance chief said that while it’s “appropriate” to look at the IMF’s resources, Europeans must look to themselves first for bailout money.
The EU agreement is “a game-changer” and the rally in emerging-market assets may continue in coming days, Societe Generale’s Anne said.
“The market doesn’t really want to pay much attention to the next phase and is enjoying the rally while it lasts,” he said by telephone. “The next phase is to assess whether the soft patch in the global economy is going to turn around and the slowdown that we are seeing is going to end soon and that’s when I’ll say that the global recession risk is also vanishing.”
MRV Engenharia & Participacoes SA, Brazil’s fourth-biggest homebuilder by revenue, was among the biggest gainers in Sao Paulo, climbing 8.2 percent. MMX Mineracao & Metalicos SA, the iron-ore producer controlled by Brazilian billionaire Eike Batista, added 11 percent.
In Russia, OAO Transneft rose 4.9 percent and OAO Gazprom climbed 4.6 percent. VTB Group, the country’s second-biggest bank, advanced 2.2 percent.
Turkey’s main equity gauge gained 2.1 percent and banks rallied after policy makers cut reserve requirements on lira liabilities, freeing up capital for increased lending.
South African shares added 2.3 percent as miners Anglo American Plc jumped 4.5 percent and BHP Billiton Plc rose 4.7 percent. Copper advanced for a second day, with prices up 15 percent this week.
Stocks in Hungary rallied 3.8 percent and Poland shares increased 2.8 percent, snapping two days of losses.
Agricultural Bank of China Ltd. gained 6.6 percent in Hong Kong after the lender’s profit jumped 40 percent. Financial shares also rallied after Guotai Junan Securities Co., Mizuho Securities Asia Ltd. and Barclays Plc said China may cut banks’ reserve requirements before the end of this year to stoke lending to small companies and boost the economy.
China may “fine-tune” open market operations and relax credit instead of cutting interest rates or reserve ratios, China Securities Journal said in an editorial today.
The Kospi Index increased 1.5 percent after the operator of South Korea’s bourse said it will temporarily waive commissions for brokerages.
The Markit iTraxx SovX CEEMEA Index of eastern European, Middle East and Africa credit-default swaps declined 25 basis points to 272, according to data provider CMA.
--Editors: Brendan Walsh, David Papadopoulos
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