EMERGING MARKETS-EM stocks open quarter on firm footing as investors see beyond US shutdown

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EM stocks up 0.45%, FX steady

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Polish PMI rises to 48.0 in September

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Hungary's PMI rises in September

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Czech factory activity shrinks for third month

By Nikhil Sharma

Oct 1 (Reuters) - Emerging market stocks kick-started the new quarter on a firm note on Wednesday, as investors looked past the partial U.S. government shutdown and turned to a slate of regional economic data.

The MSCI index of emerging market equities rose 0.45% for the day, after finishing the last quarter up 10% - its third straight quarterly gain.

The index has grown more than 25% year-to-date, set for its best year since 2017, representing investors diversifying away from Wall Street to international markets amid trade uncertainty, elevated U.S. valuations and fiscal concerns. In comparison, the Wall Street's S&P 500 is up 13.7% YTD.

Morgan Stanley said emerging market stocks are near their mid-2026 bull-case targets, driven by growing valuations. However, it remains doubtful about sustainability as growth risks persist.

A layer of uncertainty threatened global markets on Wednesday, as the U.S. government shut down much of its operations, possibly delaying the release of a crucial September employment report that could muddy the interest rate outlook.

Caution was reflected in the U.S. stock futures, which fell by nearly 1%, while the dollar fell to a one-week low. "The dollar has turned a little softer today after the US Congress failed to reach a deal to avoid a government shutdown. Investors are fearful that this could be a longer shutdown, which will only weigh further on consumer confidence and job security," analysts at ING said in a note.

The EM currencies capitalised on the weaker greenback, with a broader FX index remaining steady for the day. The index has gained 6.7% YTD, against the backdrop of seemingly fading confidence in the U.S. dollar.

The index closed the last quarter on a subdued note on Tuesday. In Central-Eastern Europe, the Polish zloty rose 0.2% as industrial activity showed signs of stabilization, even as it remained under contraction with the Purchasing Managers' Index (PMI) rising to 48.0 in September from 46.6 in August. The day's moves came after preliminary inflation data came in a touch below expectations, keeping the doors open for potential interest rate cuts. The National Bank of Poland (NBP) delivered a quarter-point cut last month but signalled caution on further decisions.

The currency was up 5.4% YTD.

Warsaw stocks jumped 0.4% on Wednesday, taking annual gains to more than 29% - among the top EM performers. Additionally, Hungary's manufacturing activity expanded in September, up to 51.5 from a revised 49.1 in August, highlighting economic recovery even as the country remains afflicted with inflationary risks.

The forint currency added 0.2%, taking its yearly gains to 5.4% - the best among peers so far - as the currency continues to leverage high interest rates at the European Union's highest of 6.5%. The main stock index advanced 0.2% on Wednesday, while up 25% YTD.

Meanwhile, the Czech Republic remained a weak spot, with manufacturing activity slipping for the third straight month, contracting further to 49.2 in September from 49.4%.

The Czech crown and Prague stocks were largely flat as investors refrained from making big bets ahead of this week's parliamentary elections. Polls reflect a lead for the opposition ANO party of eurosceptic former Prime Minister Andrej Babis. Elsewhere, the Indian rupee steadied, but remained near record lows, under a likely central bank's watch. The Reserve Bank of India kept its policy rate unchanged and indicated cuts in December as it assesses the impact of domestic tax cuts and punitive U.S. tariffs.

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(Reporting by Nikhil Sharma; Editing by Andrew Cawthorne)