Emerging Markets-Economic stimulus plans aid stocks, bonds

By Daniel Bases

NEW YORK, Jan 5 (Reuters) - Emerging market stocks, bonds and currencies rose on Monday on expectations of interest rate cuts in the new year and a major U.S. economic stimulus package that would help lift the global economy out of its doldrums.

Oil-exporting emerging markets benefited from rising crude prices as the Israeli-Palestinian conflict escalated while Russia's decision to reduce the flow of gas to Europe through Ukraine because of a pricing dispute kept markets on a cautious footing.

Investors returned to the markets in greater numbers after the New Year holiday. That boosted trading volume from the thin conditions in which emerging market sovereign bond yield spreads narrowed 108 basis points and emerging market stocks rose 14 percent in the span of one month.

"We came a long way in the last two weeks of the year in very thin trading," said one trader at a New York-based hedge fund, who added that market positioning has led to dealers being short of bonds on their books.

"For a trade right now, if you have a 1-year or 6-month view you want to be short. But if you have a one- or two-day view, you probably want to be long," the trader said.

The benchmark JP Morgan Emerging Markets Bond Index Plus <11EMJ><.JPMEMBIPLUS> showed the yield spread, a measure of investor risk appetite, improve by narrowing 20 basis points to 645 basis points over weaker U.S. Treasuries.

MSCI's emerging markets stock index <.MSCIEF> rose 3.09 percent to 598.94 while the Latin American stock index <.MILA00000PUS> rose 2.99 percent to 2,277.06.

The prospects for new tax cuts in the United States and Germany helped lift investors' spirits globally. (For more, click on [ID:nN05322720])

Mexico's peso surged 2.04 percent to 13.495 per dollar at the central bank's close and 10-year peso bond yields sank to an 8-1/2 month low of 7.68 percent, down 17 basis points .

Stubbornly high inflation in Mexico is being discounted by investors, fueling expectations of interest rate cuts to help boost the economy.

"Bonds are rallying quite substantially today. More and more what is priced in is the central bank will treat this inflation spike as temporary and start cutting rates sooner rather than later," said Igor Arsenin, head of Latin America fixed-income strategy at Credit Suisse in New York.

Ecuador's 2015 sovereign bond was bid higher on Monday. The government, which declared a default on bonds with a face value of $3.8 billion last month, is still within the 30-day grace period to make a coupon payment on this particular issue.

Finance Minister Elsa Viteri told Reuters on Dec. 31 the government had yet to decide if it will include the 2015 bonds as part of the restructuring.

"They still have until Jan. 15 to pay the coupon. There was some relative movement and the 2015s outperformed today. We didn't see any buying but prices moved," Arsenin said.

According to Reuters data, the 2015 issue, which has a face value of $650 million, was bid up 2 points in price to 32, pushing the yield down to 37.372 percent .

In the gas pricing dispute between Russia and Ukraine, Moscow cut supply by one-sixth, the amount it accuses Kiev of illegally siphoning off. The Ukrainian hrvnyia , Europe's second-worst-performing currency in 2008 after the collapsed Icelandic crown, lost 4.29 percent. However trading was sluggish while both Russian and Ukrainian stock markets were closed ahead of the Orthodox Christmas on Jan 7.

(For more click on [ID:nL513944])

Ukraine's 2016 Global bond was bid down 2.25 points in price to 36.063, pushing the yield up to 26.074 percent. Russia's 2030 bond was bid down 0.75 point in price to 86.25, yielding 10.139 percent .

U.S. crude oil prices gained 2.47 to settle at $48.81 after touching a three week high of $49.28. (Editing by Dan Grebler)