EMERGING MARKET RECOVERED AS ECB AND FED REMAIN DOVISH

MSCI’s index of emerging market (EM) stocks jumped 1% and was headed for its best day since early June. The index had lost as much as 2.6% this week, before arresting its fall late Wednesday. Improving sentiment over the second-quarter earnings season helped investors look past possible economic ructions caused by a rise in global COVID-19 cases, fears of which had spurred sell-offs in recent sessions.

Asian equities tracked their global counterparts higher, with analysts pegging the gains on "buy the dip" behaviour and positive sentiment from the U.S. and Europe markets fuelled by ECB’s dovish stance. Most stock indexes in the region like in India, Malaysia and Thailand have declined on a month-to-date basis as concerns over a Delta variant-led spike in COVID-19 infections and lockdowns worried investors. The Philippine stock index was up 1.6% on Thursday after four sessions of heavy losses, while Singapore and South Korea equities rose more than 1% each.

MSCI’s currency index jumped 0.3% and was set for its best day in nearly a month, with most EM currencies benefiting from a dip in the dollar and other safe havens. The rupiah saw its best day in almost two weeks on Thursday, as Bank Indonesia (BI) held interest rates steady to support the pandemic-ravaged economy and sounded optimism on 2021 growth, even as most of the country remained under tough curbs. Regional peers Singapore's dollar, the South Korean won and Taiwan's dollar also gained, basking in the greenback's weakness as risk appetite rebounded with strong earnings lifting Wall Street stocks overnight. The rupiah firmed 0.4% after the Indonesian central bank kept its key interest rate at a record low of 3.50% as widely expected, and said it would strengthen measures to stabilise the currency after a bout of volatility. The rupiah has weakened 2.5% over the past six weeks since the COVID-19 situation in the heavily-populated Indonesia worsened, with total cases nearing 3 million amid a slow vaccination rate and a creaky healthcare system. However, BI predicted fiscal 2021 growth could be higher than the midpoint of its 3.5%-4.3% range, citing a less-than-expected decline in activity during current mobility curbs while banking on vaccinations gathering pace. Local stocks jumped 1.8%, with lenders leading the gains as the central bank forecast better loan growth and promised it would keep providing ample liquidity.

Central European currencies rebounded on Thursday from losses marked this week as investors' risk aversion eased and market focus turned to the European Central Bank (ECB), which is expected to keep its stimulus taps fully open. While the ECB remains dovish and looks certain to promise an even longer period of stimulus on Thursday to back commitment to boost inflation, strong price pressures in central Europe have already prompted the Hungarian and Czech central banks to raise interest rates, with more moves expected. Poland is yet to join the group, although analysts are waiting for cues it could also turn to tighter policy sooner rather than later. The zloty - under pressure this week like other units in central Europe by concerns over the relentless surge in coronavirus cases worldwide - lagged gains seen by the Hungarian forint and Czech crown this year. On Thursday, the zloty led the region higher, strengthening 0.2% to 4.578 to the euro by 0842 GMT. Stock indexes in the region that hit record or multi-year highs in the past month also rebounded with global stocks on bets of a dovish ECB. Currencies found support from the euro - the region's reference currency - which stabilised off 3-1/2-month lows before the ECB meeting later due in the day. Any boost for the euro after the ECB could add to strengthening in the region. The crown was up at 25.64 per euro, trailing its 30-day moving average of 25.57. The forint inched up 0.1% to 359.35 to the euro, aided by hawkish comments from its central bank. The forint has stuck in a tight range around 360 in recent trading and dealers say it will likely hang there until the Hungarian central bank meets next week.

The economic hit from the pandemic had prompted most EM central banks to cut interest rates to support growth. But with vaccinations picking up and more economies reopening, several banks have begun hiking cycles. Investors are also closely watching for economic cues from a European Central Bank meeting scheduled this week and FED move in coming month.