London - The South African rand rallied to four-week highs on Monday after fraud charges against Finance Minister Pravin Gordhan were dismissed. But broader emerging assets were lacklustre, with stocks set for the first monthly fall since May.
The rand firmed 1.6 percent against the dollar and government bonds rallied after the state prosecutor said he was satisfied Gordan, who is popular with investors and businesses, did not intend to act unlawfully.
The yield on South Africa's benchmark 2026 bond issue fell 12.5 basis points (bps) to three-week lows of 8.75 percent. The yield premium paid by South African sovereign bonds over U.S. Treasuries narrowed by 11 bps on the day to 281 basis points, the lowest in nearly a month.
South Africa's banking index rose 2.8 percent but Johannesburg shares were still down 0.4 percent.
Read also: Rand rallies as Gordhan is off the hook
“It's good news the charges were dropped but this does not necessarily remove the possibility that South Africa will be downgraded in December,” Roxana Hulea, a strategist at Societe Generale, said, referring to the possibility of agencies cutting South Africa's credit rating to so-called “junk” from the current investment grade.
“I wouldn't say this is the end of it. Going into ... next year we will continue to be in this environment, plagued by a lot of political news and headlines which will drive markets.”
South Africa's large current account deficit means it is extremely vulnerable to tighter monetary policy in the United States.
MSCI's emerging equity index slipped 0.1 percent with export-driven Asian economies feeling the heat on news of an FBI review of U.S. presidential candidate Hillary Clinton's emails.
The fresh investigation, announced just a week before the U.S. election, has unsettled investors in manufacturing-led emerging markets, given Republican candidate Donald Trump's protectionist policies.
Hong Kong shares slipped to two-month lows, whilst South Korean stocks were down 0.6 percent to a seven-week low.
“There's a general fear that a Trump presidency would be bad for emerging markets and lead to a flight to safety,” said William Jackson, senior emerging markets economist at Capital Economics.
The Mexican peso firmed 0.24 percent, climbing off three-week lows hit on Friday when the FBI news broke . The peso is seen as a barometer of the market's perception of who will win the U.S. election, as Mexico sends 80 percent of its exports to the United States.
With both China and Mexico facing potential trade tariffs in the event of a Trump victory, Jackson said there were concerns about the impact on their economies and whether their currencies would need to weaken further to restore competitiveness.
The Chinese yuan has lost 1.4 percent against the dollar in October, hitting six-year lows, though it rose on Monday as the central bank set its daily guidance rate at the strongest in more than a month.
South Korea's won was 0.3 percent firmer against the dollar, bouncing off three-and-a-half month lows, but was still set to end the month down 3.6 percent. President Park Geun-hye is facing a deepening crisis over allegations that a friend exerted inappropriate influence over her.
The Turkish lira was flat but still trading near record lows hit on Friday after Turkey stepped up a crackdown in the wake of July's failed coup, sacking another 10 000 civil servants and closing 15 more media outlets.
Third-quarter tourism revenues fell 32.7 percent year-on-year and the trade deficit widened to $4.36 billion in September, the latest data showed.
“Today's move is pretty small but the lira is underperforming other currencies,” said Jackson. “This is a currency that has an economy with large vulnerabilities.”
The Russian rouble weakened 0.3 percent against the dollar as oil prices dipped below $50 a barrel.
REUTERS