Emerging Stocks, Currencies Decline on Global Stimulus Outlook

  • MSCI Emerging Markets Index retreats from two-month high
  • Brazil's real and Ibovespa fall amid political turmoil

Emerging-market stocks fell from a two-month high as investors weighed the prospects for a pullback in the monetary stimulus in developed nations that has helped prop up demand for riskier assets.

The MSCI Emerging Markets Index slipped 0.3 percent to 864.47, ending a three-day gain. Fifty-day historical volatility in the equity benchmark is around the highest level since late 2011. Investors have been whipsawed as mixed economic data from China to the U.S. and Europe gave little clarity to the outlook for global growth and central banks’ monetary policy. A gauge of raw-material companies slumped the most among 10 industry groups.

A report showing an improvement in lending in the euro area Tuesday damped speculation that the European Central Bank will expand its quantitative-easing program. The Bloomberg Commodity Index, which sank the most in a month Monday as data showed China’s economy expanded at the slowest pace since 2009 in the third quarter, rebounded after a report showed faster growth in services. Federal Reserve Bank of San Francisco chief John Williams said Monday that U.S. policy makers should raise interest rates in the near future as inflation is expected to stabilize.

“After having a great run at the beginning of the month, EM stocks and currencies are starting to retreat amid falling commodity prices and pending uncertainty if the Fed is raising rates in 2015,” Bernd Berg, director of emerging markets strategy at Societe General in London, said by e-mail Tuesday. “The market remains in wait-and-see mode for the ECB and some important U.S. data.”

Currencies Weaken

Demand for riskier assets had improved this month after the Fed held off on raising interest rates in September and speculation grew that U.S. monetary tightening may not begin until next year. A strong U.S. payrolls release on Nov. 6 could prompt the fed to raise interest rates in 2015, Berg said.

Currencies in Malaysia, Chile and South Korea each weakened at least 0.8 percent against the dollar. A Bloomberg gauge tracking 20 developing-nation currencies declined 0.3 percent, falling for a third day. The premium investors demand to own emerging-market debt over U.S. Treasuries narrowed two basis points to 393 basis points, according to JPMorgan Chase & Co. indexes.

Russia, Brazil

Russia’s ruble rose 0.2 percent, strengthening as companies bought the local currency to pay taxes and the price of oil became a much smaller swing factor. The 30-day correlation between the two assets dropped to about 0.68 from as much as 0.92 on Oct. 6, a record high. At a reading of 1, they would move in lockstep. Russian companies are due to pay about 483 billion rubles on Oct. 26, according to Sberbank CIB. The Micex Index gained 0.4 percent.

Brazil’s real dropped 0.5 percent and volatility remained the highest among emerging market currencies as concern over the outlook for Latin America’s largest economy as political strife outweighed optimism that Finance Minister Joaquim Levy will stay in his post. The Ibovespa slid 0.8 percent as exporters including iron-ore producer Vale SA and pulpmaker Fibria Celulose SA retreated.

A group of Brazilian lawyers is expected to file a request on Wednesday to begin impeachment proceedings against President Dilma Rousseff. Fitch Ratings lowered Brazil’s debt rating to one level above junk last week, delivering the fourth downgrade under Rousseff’s watch, and said it could cut the grade again as government finances deteriorate. A shrinking economy and a growing corruption scandal have intensified a political crisis that has sidetracked the president’s economic agenda.

China Gains

All 10 industry group in the MSCI developing-nation stock gauge declined Tuesday. The benchmark has dropped 9.6 percent this year and is valued at 11.3 times projected 12-month earnings, data compiled by Bloomberg show. The MSCI World Index, which has retreated 1.9 percent in 2015, trades at a multiple of 15.6.

The Shanghai Composite Index added 1.1 percent to the highest level in two months. The ChiNext Composite Index, whose 484 stocks represent the most dynamic parts of China’s economy such as technology, advanced 2.9 percent.

Fed officials at their meeting last month kept rates near zero amid growing risks to their outlook, due primarily to slower growth in China. Chair Janet Yellen, Vice Chairman Stanley Fischer and other officials, including Williams, have since said they still expect a rate rise is warranted this year. Policy makers meet again Oct. 27-28 and in December.

(An earlier version of this story corrected year-to-date drop for emerging stock index in sixth paragraph.)

Before it's here, it's on the Bloomberg Terminal. LEARN MORE