By Wayne Cole
SYDNEY (Reuters) - Asian markets rallied on Wednesday after Turkey stunned investors with a huge hike in interest rates, stirring hopes the drastic action would short-circuit a vicious cycle of selling in emerging markets and revive risk appetite generally.
The nascent optimism faces an imminent test from the U.S. Federal Reserve which is widely expected to trim its asset buying program by another $10 billion a month at its policy meeting later in the session.
But for now the relief was enough to lift Japan's Nikkei 2.2 percent <.N225> and S&P 500 e-mini futures 0.5 percent as safe havens such as the yen, bonds and gold all eased.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> rose 1.2 percent after three sessions of falls.
Turkey followed India by tightening policy at a midnight meeting of its central bank, with a huge hike of 425 basis points taking the overnight lending rate all the way to 12 percent.
"Desperate times call for desperate measures, this is a confidence-saving measure," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.
"It will definitely hurt but it might be enough to stem the bleeding. It looks like the lira acted positively, whether it lasts is anyone's question."
Early signs were that it might be enough to stem the rout in the Turkish lira, which surged by the most in five years to reach 2.1650 per dollar. That was a long way from Monday's historic low of 2.39 with turnover exceptionally strong in Asia, where the currency is rarely traded.
More emerging market central banks are expected to take steps to quell a mix of inflationary pressures at home and a flight of capital abroad. South Africa's central bank holds its policy meeting later on Wednesday.
FED STILL AHEAD
Just the prospect of action had helped stabilize stock markets across the globe after several days of hectic selling. The MSCI emerging equity index <.MSCIEF> climbed 1.1 percent from a 4-1/2 month low.
On Wall Street, the Dow <.DJI> ended Tuesday with gains of 0.57 percent, while the S&P 500 <.SPX> rose 0.61 percent.
The calmer tone was reflected in the market's favored measure of volatility, the VIX index, which <.VIX> dropped over 9.0 percent on Tuesday to 15.80 and off a peak of 18.99.
Currencies leveraged to commodity prices and global economic growth benefited from the better mood. Also helping was surprising strength in industrial production in South Korea - an antidote to recent softness in Chinese data.
The Australian dollar rose a third of a U.S. cent to $0.8803 in the wake of the news from Turkey. The Aussie is often used as a proxy for hedging against stress in less liquid emerging markets.
Currencies from Malaysia to Indonesia and India all gained, while the South Korean won boasted its biggest daily rise in four months.
Going the other way, the safe-haven yen gave up some of its recent gains as the dollar advanced to 103.25 yen from a seven-week trough of 101.71 touched at the start of the week.
Emerging markets could still be vulnerable to whatever the Fed decides on policy. The reduction of U.S. stimulus, combined with the resulting higher bond yields, is one reason funds have been switching money back to the developed world.
Yet many investors seem to have made peace with a steady pullback in asset-buying, given it is balanced with a commitment to keeping rates near zero for a long time to come.
Benchmark 10-year Treasury yields, for instance, have steadied around 2.78 percent compared to a peak of 3.04 percent at the start of the month.
In commodity markets, gold lapsed to $1,253.50 an ounce to be well off Monday's high of $1,278.01.
Oil markets were awaiting inventory data from the U.S. Energy Information Administration (EIA), due later in the day, to gauge the country's demand.
U.S. crude edged back 12 cents to $97.29 having hit its highest so far this year on expectations that supplies were dwindling. Brent crude added 10 cents to $107.51.
(Reporting by Wayne Cole; Editing by Eric Meijer)
