Emerging Currencies Weaken as Fed Comments Stoke Rate Concern

  • Rand to real drop as Bullard says near-zero rate unneeded
  • Price swings in equity gauge at the widest since 2012

Emerging-market currencies weakened against the dollar and stock volatility hovered near the highest level since March 2012 as Federal Reserve officials signaled in speeches that a December increase in U.S. interest rates is likely, a move that would damp demand for riskier assets.

Exchange rates in commodity-exporting nations from Colombia to Brazil, Russia and South Africa led declines among 24 developing-nation peers as raw-material prices dropped. Investors sold Chinese shares on the mainland in favor of Hong Kong-listed stocks, taking advantage of the valuation difference between them. The MSCI Emerging Markets Index was little changed at 833.74 after fluctuating between a 0.1 percent decline and a 0.5 percent gain.

Historical 100-day volatility in stocks has surged to a three-year high of 21 percent amid concern the first U.S. interest-rate increase in nine years could drain cash flow from riskier assets. A slowdown in China, lower commodity prices and political strife from Turkey to Brazil have further clouded the scope for gains. Federal Reserve Bank of St. Louis President James Bullard said Thursday that keeping rates near zero is no longer needed with jobs and inflation gains near the central bank’s goals. New York Fed President William C. Dudley said conditions for a liftoff “could soon be satisfied.”

“If we can avoid more negative news, then perhaps the market can be stable, show some upside,” said Nathan Griffiths, a senior emerging-market equities manager who helps oversee $1.2 billion at NN Investment Partners in The Hague. “But with the headwind of the impending Fed hiking cycle, it is unlikely we have sharp upside without some more meaningful positives such as accelerating China growth.”

China Slump

Futures traders assign a two-thirds probability to a December increase, data compiled by Bloomberg show.

A gauge of emerging-market currencies fell 0.4 percent, ending a two-day advance. Colombia’s peso tumbled 2.4 percent, the most in 11 weeks. The ruble and rand each slipped at least 1 percent. Colombia’s peso sank 3 percent, the most among peers, amid concern higher borrowing costs will will make it more difficult for the nation to fund its current account deficit, which is running at the highest in more than three decades. The Bloomberg Commodity Index slid 0.9 percent to the lowest since July 1999 in a seventh straight decline.

The policy-setting Federal Open Market Committee meets in Washington on Dec. 15-16, when it will decide on whether to raise the benchmark federal funds rate for the first time since 2006. It has held rates near zero since late 2008.

The Shanghai Composite Index fell 0.5 percent. Concern is increasing that Chinese stocks are overvalued after the Shanghai gauge rebounded 24 percent from the August low amid a worsening outlook for the economy and earnings.

Zloty Weakens

Bridgewater Associates, once the biggest investor in the world’s two largest emerging-market exchange-traded funds, sold 41 percent of its holdings in the third quarter, according to a form 13F filed Thursday. The firm, led by Ray Dalio, cut its investments in Vanguard Group Inc. and BlackRock Inc.’s ETFs to a combined 104 million shares, from 175 million in the previous three-month period.

Hong Kong’s Hang Seng China Enterprises Index halted a four-day losing streak, gaining 1.6 percent, as financial and energy companies advanced. There are very few reasons for global investors to own China’s A shares given their premium to H shares trading in Hong Kong, Kevin Gardiner, global investment strategist at Rothschild Wealth Management, said in an online seminar on Wednesday. Dual-listed stocks are now 38 percent more expensive in the mainland than Hong Kong, according to the Hang Seng China AH Premium Index.

The zloty weakened 0.4 percent against the euro. Members of Poland’s new parliament were being sworn in after the Law & Justice party won a majority in Oct. 25 elections.

ETF Outflows

Seven industry groups on the MSCI emerging-markets index fell, led by raw-material producers. The measure trades at 11.1 times the projected earnings of its members, just below the 10-year average. That’s 30 percent cheaper than the valuation for developed-nation stocks.

Emerging markets led net outflows among U.S. exchange-traded funds on Nov. 11, losing $292 million, according to data compiled by Bloomberg.

The premium investors demand to own emerging-market debt over U.S. Treasuries was unchanged at 384 basis points, according to JPMorgan Chase & Co. indexes.

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