EMERGING MARKETS-Oil and dollar again stall emerging market gains

Emerging markets retreated on Tuesday as oil prices stayed under $50 per barrel and the dollar firmed, with the Russian rouble trading near two-month lows and emerging stocks posting their fourth loss in five days.

After Monday’s French election-inspired bounce, emerging stocks tracked world markets lower, though they stand half a percent off recent two-year highs. Chinese shares meanwhile posted a sixth day of losses as the central bank’s decision to hold off conducting open market operations for the third day stoked concerns about a shift to a tightening policy bias.

“The biggest driver in EM has been and continues to be commodity prices,” Unicredit strategist Kiran Kowshik said. “Chinese data are still stronger than they were last year but they are coming off a bit. There are concerns that the credit stimulus that the authorities put in place is coming off as well. That paints a negative picture for commodity prices and by extension many emerging markets.”

The focus in Asia was on South Korea’s presidential election, which is expected to be won by liberal Moon Jae-in . The Seoul stock market, which finished at a record high on Monday, was shut but the won slipped half a percent against the dollar. Currencies were dominated by a 0.2 percent rise in the dollar index as well as oil’s retreat. The rouble slipped in offshore trade, with Moscow shut for a holiday, having lost 5 percent in the past 10 days in line with crude. The lira fell 0.4 percent to a two-week low, while central European currencies eased off multi-month highs hit on Monday in the wake of the French election . However, emerging currencies could benefit from the recent tumble in volatility to 23-year lows as measured by the VIX index, analysts at Societe Generale noted.

“Collapsing vol is bad for the yen and good for yieldier currencies generally. It’s an invitation to add risk and yield to a portfolio if volatility-adjusted returns are expected to be higher as a result of the low vol,” they told clients.

In Nigeria, investors are awaiting further moves in the naira which has fallen past 400 per dollar in the special trading window for investors, although its official rate remains around 305. The stock market has surged to 3-1/2-month highs.