Emerging Markets Surge as Sri Lanka Secures Debt Restructuring Deal

Risk sentiment improved in emerging markets with local stocks nearing a two-year high, driven by Sri Lanka's debt restructuring deal and hopes for U.S. interest rate cuts. The MSCI index rose, tech-heavy stocks gained, and India's market hit record highs. Currencies appreciated, and crude prices remained above $80 a barrel.

Risk sentiment got a lift across most emerging markets on Thursday, with an index tracking local stocks just shy of hitting a more than two-year high, while Sri Lankan bonds jumped after the island nation secured a deal to restructure its debt. MSCI's index tracking equities in developing economies rose 0.9%, with tech-heavy equities in Taiwan and Korea advancing more than 1% each, while Indian markets also traded at record highs.

Risk taking was buoyed by signs that the U.S. economy was cooling and U.S. policymakers acknowledged local price pressures were easing, both of which stoked hopes for imminent interest rate cuts by the Federal Reserve. Hasnain Malik, head of equity research at Dubai-based Tellimer Research, added that in smaller emerging markets, countries going through a course correction of years of bad macroeconomic policy have also dominated performance.

An index tracking currencies firmed 0.2% against the dollar. Trading volumes are expected to be thinned given a public holiday in the U.S. Meanwhile, yield on Sri Lanka's dollar bonds maturing in 2030 dropped more than 67 basis point (bps) after the government announced it had secured a provisional deal to restructure around $12.5 billion of its debt with international bondholders.

"Debt restructuring is edging forward, but the next test in Sri Lanka will come with the general election, where the high opinion poll support of leftist populist AK Dissanayake should be a concern," Malik added. The south Asian country's rupee is languishing at record lows after the country defaulted on its debt in 2022. Since then the International Monetary Fund's programme has helped the local economy stabilise.

Israel's shekel appreciated 0.7%, while Egypt's pound firmed 0.4%. Prime Minister Benjamin Netanyahu will convene a meeting of his security cabinet later in the day to discuss proposals from Hamas for a possible ceasefire deal to end the nine-month conflict in Gaza, sources said. Crude prices, sensitive to developments in the Middle East and a key resource for emerging markets, were lower, but still above $80 a barrel.

Turkey's lira was flat ahead of the announcement of the May non-performing loans ratio for the local banking sector. After Wednesday's data showed signs of disinflation in the country, Governor Fatih Karahan affirmed that the local central bank will maintain its tight policy to combat soaring prices, as per a report.

In central and eastern Europe, Hungary's forint led gains among peers against the euro, while Poland's zloty inched up 0.1% ahead of comments by the domestic central bank governor after the regulator left interest rates unchanged on Wednesday. Elsewhere, China International Capital Corp (CICC) plans to expand its presence in Southeast Asia, its investment banking head said.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)