Emerging Currencies Fall on Fed Confusion; Commodity Stocks Drop

  • Brazil's real sinks to record low on credit rating concern
  • Hyundai Motor, Kia seen benefiting from Volkswagen Scandal

Emerging-market currencies retreated for a third day and stocks fell as slumping commodity prices and conflicting signals from the Federal Reserve on when it will start raising interest rates curtailed demand for riskier assets.

Brazil’s real slumped to the weakest level on record against the dollar as concern mounted that the government won’t be able to avoid further credit rating cuts. A gauge tracking 20 developing-nation currencies fell 0.9 percent to a two-week low. The lira slid after Turkey’s central bank kept borrowing costs on hold. Aluminum maker Hindalco Industries Ltd. was among the worst performers on the S&P BSE Sensex Index in Mumbai, dropping 6.3 percent. Copper producer KGHM Polska Miedz SA declined 5.2 percent in Warsaw.

The Fed’s decision to keep U.S. borrowing costs on hold last week failed to calm emerging markets rattled by concern that China’s economy is faltering and signs of a global slowdown. As a fourth Fed official talked up prospects for higher interest rates in 2015, a lecture by Chair Janet Yellen later this week may offer greater clarity after the U.S. central bank left borrowing costs unchanged last week.

“The short-term backdrop for emerging-market foreign exchange remains highly negative,” said Bernd Berg, a strategist at Societe Generale SA in London, who recommends adding to long U.S. dollar-emerging market foreign-exchange positions. “A lot of market participants have been betting on an EM FX relief rally post the dovish Fed decision. Now people realize that nothing has changed and there is no fundamental argument for any” rally, he said.

Valuation Discount

The MSCI Emerging Markets Index decreased 0.9 percent to 808.23. All 10 industry groups declined, as gauges tracking raw-material and energy companies slid at least 1.8 percent. The Bloomberg Commodity Index dropped 1 percent to the lowest level this month.

A 15 percent selloff in developing-country equities this year sent average valuations to 10.7 times projected 12-month earnings, a 28 percent discount to developed-nation shares in the MSCI World Index.

Brazil’s real weakened 1.6 percent to 4.0503 per dollar and the Ibovespa slumped amid mounting concern that President Dilma Rousseff’s policies won’t be enough to avoid further credit rating cuts. Standard & Poor’s cut the nation to junk on Sept. 9. The stock benchmark slid 0.7 percent to a three-week low.

Ringgit, Lira

Stocks in India lost 2.1 percent, while the FTSE/JSE Africa All Shares Index retreated 1.7 percent in Johannesburg. Equity gauges in Russia, Poland and the Czech Republic lost at least 1.5 percent each.

Malaysia’s ringgit fell 0.8 percent. The New York Times reported the U.S. Justice Department has started an investigation into allegations of corruption associated with Malaysian Prime Minister Najib Razak and people close to him. 

The lira weakened 0.6 percent. Turkish policy makers kept the benchmark repurchase rate at 7.5 percent, in line with the median estimate in a Bloomberg survey.

The premium investors demand to own emerging-market debt over U.S. Treasuries widened 11 basis points to 392 basis points, according to JPMorgan Chase & Co. indexes.

Fed Volatility

“The Fed has introduced further volatility to global markets by not raising rates and investors are still looking for rate-hike clues,” said Chris Eng, head of research at Etiqa Insurance Bhd. and Etiqa Takaful Bhd., units of Malayan Banking Bhd., which manages about 25 billion ringgit ($5.8 billion). Etiqa is “neutral” on equities and bonds pending more clarity, he said.

Fed Bank of Atlanta chief Dennis Lockhart joined Fed presidents from San Francisco, St Louis and Richmond on Monday, saying he remains confident policy will be tightened this year as concerns over turmoil in global markets should prove temporary.

In Asia, the Shanghai Composite Index rose 0.9 percent. China and the U.S. are expected to reach agreements on trade, energy, climate, finance, aviation, defense and infrastructure construction during President Xi Jinping’s state visit Sept. 22-25, Foreign Minister Wang Yi said last week. 

Hyundai Motor Co. and Kia Motors Corp. gained 3.1 percent in Seoul as South Korea’s Kospi index added 0.9 percent. Brokerages including Samsung Securities Co. said the South Korean carmakers may benefit from Volkswagen AG’s diesel-emissions cheating scandal. The U.S. Justice Department started investigations on Volkswagen over its admission that it cheated on federal air pollution tests, according to two U.S. officials.

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