- Real strengthens as Fitch maintains Brazil's investment grade
- All 10 industry groups in MSCI's equity gauge advance
Emerging-market stocks ended a two-day decline and currencies strengthened as traders weighed the latest U.S. economic data for clues about the timing of an increase the Federal Reserve’s near-zero interest rates that have propped up demand for riskier assets.
The MSCI Emerging Markets Index added 1.8 percent to 864.73. A Bloomberg gauge tracking 20 currencies increased 0.7 percent to the highest level in two months. Russian government bonds rose for a second day on speculation a stabilizing ruble will allow the central bank to resume interest-rate reductions. The real strengthened and the Ibovespa gained as Fitch Ratings cut Brazil’s credit rating by one notch, while keeping the nation’s investment-grade status.
Trading in Fed futures indicates investors have all but ruled out a U.S. interest rate increase this month, while the odds of a December liftoff have fallen to 30 percent from 46 percent a day after policy makers held off on raising borrowing costs last month. Fifty-day historical volatility in developing-nation stocks jumped to the highest level since 2012 Thursday as data showing unexpected strength in the U.S. labor market and rising inflation was released a day after a report showed weakness in retail sales growth.
“The markets are taking hints from the recent U.S. data, which has been weakish, and also the Fed comments,” Aurelija Augulyte, a senior foreign-exchange strategist at Nordea Markets in Copenhagen, said. “It is increasingly obvious the Fed is split in their views, maybe more than ever, which makes a 2015 hike close to impossible in the markets’ view. This keeps the U.S. dollar yields low and reduces the financing risks for emerging markets.”
Emerging-market investors have endured wide price swings since the Fed decided to postpone its first interest rate increase since 2006 at its meeting that ended Sept. 17. Higher U.S. borrowing costs are expected to draw money out of developing nations as the dollar strengthens. Policy makers cited China’s surprise currency devaluation in August, concern that global growth is faltering and political turmoil in countries including Brazil and Turkey as factors influencing their decision.
Brazil’s real strengthened 0.5 percent against the dollar Thursday and the Ibovespa equity benchmark increased 1 percent. Fitch lowered Brazil one step to BBB-, the lowest investment grade, with a negative outlook, citing the government’s rising debt burden, difficulty in shoring up its budget and a slumping economy. Standard & Poor’s cut the country to junk on Sept. 9, while Moody’s Investors Service moved it to the lowest investment grade in August.
The yield on benchmark Russian government bonds due in 2027 fell seven basis points to 10.3 percent. The ruble strengthened 2.1 percent against the dollar. Forward-rate agreements showed traders predicting 19 basis points of Russian interest-rate increases in mid-August in the next three months, compared with 1 basis point of cuts as of Wednesday. The Micex Index jumped 0.5 percent.
The developing-markets index has fallen 9.6 percent in 2015 and is trading at 11.3 times projected 12-month earnings, data compiled by Bloomberg show. The MSCI World Index has declined 2 percent this year and is valued at a multiple of 15.6.
The premium investors demand to own emerging-market debt over U.S. Treasuries narrowed seven basis points to 403 basis points on Thursday, according to JPMorgan Chase & Co. indexes. Emerging-markets exchange-traded funds have recorded inflows of $118 million in October. While the amount is relatively small, it marks a reversal from the previous 12 months, when investors pulled $7.2 billion out of the funds, according to date from Bloomberg Intelligence.
All 10 industry groups in the emerging-market equity measure rose, paced by consumer discretionary and technology stocks.
The Shanghai Composite Index surged 2.3 percent and the Hang Seng China Enterprises Index rose 2.1 percent. China Mobile Ltd. climbed 2.7 percent in Hong Kong. The government injected 231.4 billion yuan ($36 billion) of network assets such as base stations into a new company called China Tower Corp., bolstering speculation policy makers will accelerate reforms of state-owned companies.
The Communist Party will hold a key meeting during Oct. 26-29 to deliberate on an economic and social development plan for China over the next five years, according to the official Xinhua News Agency.