Emerging Stocks Rise, Currencies Strengthen on Fed Rate Outlook

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The Search for September Signals

Emerging-market stocks rose for the first time in six days as currencies strengthened amid speculation the Federal Reserve will maintain a low U.S. interest-rate environment after an initial increase this year.

Petroleo Brasileiro SA led gains in Sao Paulo as crude rebounded. China’s benchmark stock gauge ended a three-day, 11 percent drop. The ruble rose for the first time in six days as the Bank of Russia said it stopped buying foreign currency. A Bloomberg gauge of 20 developing-nation currencies gained 0.1 percent to the highest level in a week.

The Fed reiterated in a statement after its two-day meeting that it will take a “balanced approach” to borrowing-cost increases and U.S. economic conditions may warrant keeping the key rate below normal levels, even as employment and inflation are near its targets. Economists surveyed by Bloomberg saw virtually no chance of a rate increase on Wednesday.

“A September rate hike is by no means off the table, but it’s by no means a done deal,” Nicholas Spiro, a managing director at advisory firm Spiro Sovereign Strategy, said by phone from London. “But what developed and what emerging markets are now focused on is the pace and the scope of the tightening, and we see that Chair Janet Yellen wants to go airborne with the least amount of turbulence and she does not want to spook the market, which investors view as a good sign.”

The Fed’s near-zero interest rates have helped support demand for riskier assets in developing nations.

Fed Outlook

The MSCI Emerging Markets Index rose 1 percent to 900.12, halting a five-day drop that pushed the gauge to the lowest level since June 2013. The measure has fallen 5.9 percent this year and trades at 11.2 times projected earnings of its members, data compiled by Bloomberg show. That compares with a 2015 gain of 3 percent and a valuation of 16.4 times for the MSCI World Index of advanced-nation shares.

Economists put the odds of a September increase in U.S. interest rates at about 50 percent, a Bloomberg survey published July 22 showed. Yellen said this month the central bank may raise rates this year, and signaled that the pace of subsequent increases would be gradual.

“Its impact will be more contained because the changes will be gradual,” said Nescyn Presinede, a trader at Manila-based Rizal Commercial Banking Corp., which manages $1.8 billion in trust assets.

Petrobras jumped 7.5 percent in Sao Paulo. The state-run oil producer contributed the most to a 1.3 percent gain in the Ibovespa Brazilian stock benchmark.

Russia, China

Brent crude ended a five-day streak of declines, rising 0.2 percent to $53.38 a barrel. Oil prices increased after data showed an unexpected drop in U.S. stockpiles.

The ruble rose 2.3 percent after a 5.1 percent slump in five days almost erased this year’s gains. The central bank said it was stopping daily purchases of foreign exchange, suggesting policy makers are concerned the currency is falling too rapidly. Policy makers had started buying foreign currency on May 13 to bolster its reserves, making about $10 billion of total purchases since then. The dollar-denominated RTS Index of Russian stocks rallied 3.2 percent, the most since early May.

The Shanghai Composite Index climbed 3.4 percent as speculation of state support overshadowed signs of waning interest by retail investors and margin traders. Hong Kong’s Hang Seng China Enterprises Index added 0.9 percent.

Turnover on the Shanghai bourse has halved from its peak in June as the government took unprecedented measures to stop the rout. While state funds have been tasked with buying shares, margin traders are cashing out and new equity-account openings are tumbling.

The premium investors demand to hold emerging-market debt over U.S. Treasuries narrowed six basis points to 366 basis points, according to JPMorgan Chase & Co. indexes.

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