LONDON

Emerging stocks fell to one-week lows on Tuesday, while currencies firmed marginally ahead of a widely-anticipated speech by US President Donald Trump, although both asset classes were on track for hefty monthly gains.

Markets worldwide are on tenterhooks before Trump’s first Congressional address, where he could provide detail on his spending and tax reform plans and may also accuse countries, especially China, of currency manipulation.

Lack of action so far on these issues has kept the dollar subdued and unleashed stock market bulls — MSCI’s emerging equity index hit 19-month highs with 10 per cent year-to-date gains at one point.

While the index is set for a second month of gains, some investors have retreated in the run-up to Trump speech.

“If our worst fears are confirmed (on protectionism) you can expect quite a correction in emerging markets,” said Maarten-Jan Bakkum, investment strategist at NN Investment Partners who is neutral on emerging equities.

“Since the [Trump] inauguration, markets have priced out some of the protectionism risks ... people are impatient to play the emerging markets theme as (economic) data has been so good.” Emerging equity funds have received $6.5 billion this year, and funds dedicated to Brazil and Russia have led inflows to country-specific emerging equity vehicles, according to data from Bank of America Merrill Lynch.

These flows have allowed emerging currencies to firm against the dollar, with the Russian rouble up 4 per cent in its third month of gains, lifted also by robust oil prices.

The lira enjoyed its first month of gains since August, as Turkey’s central bank raised funding rates to 10.5 per cent.

Currencies in Asia, the region most vulnerable to greater US protectionism, drifted off multi-month highs The Indian rupee moved further off three-month highs before 1200 GMT data that is likely to show economic growth slowed to a three-year low of 6.4 per cent in the Oct-Dec 2016 quarter due to a sweeping currency reform exercise.

In central Europe, Hungarian shares were the biggest movers with a 1.2 per cent fall, led by a 3 per cent decline in oil firm MOL which posted lower fourth quarter profits. The index may close in the red after four months of gains, having hit successive record highs.

The forint was flat against the euro before a central bank meeting that is expected to hold rates at 0.9 per cent, despite rising inflation. ING Bank analysts said, however, this would not undermine the forint which remains close to recent five-week highs around 306.6 per euro.

“The (central bank) seems to be determined to keep monetary policy loose and should look through rising domestic inflation,” ING told clients, noting Hungarian bond inflows thanks to robust risk appetite and the recent fall in German two-year yields.

“As both factors seem to be still in place, a limited euro/forint downtrend is likely to continue for a while yet.

Euro/forint to re-test the 307 level,” they added.

One of the gloomy spots was Nigeria, which failed to devalue the naira this month after raising expectations it was about to do so. Latest data showed the economy contracted 1.5 per cent last year.

The naira slipped 1 per cent in the six-month NDF market after central bank dollar sales on Monday, which banks offered on to retail clients at 375 per dollar — far weaker than official 305 per dollar rates. But it firmed 2.2 per cent to 450 per dollar on the black market on Tuesday, a more than four-month high.

On bond markets, emerging sovereign dollar bonds’ yield premia over Treasuries was at two-week lows around 312 basis points, having contracted 16 bps this month.