Emerging Assets Fall as Yellen Cites Risk in Postponing Fed Move

Updated on
  • Russian ruble, Colombian peso lead currency drop as oil falls
  • Egyptian equities rally on bets of foreign investors returning

Emerging-market stocks and currencies weakened as Federal Reserve Chair Janet Yellen signaled confidence in the economy, bolstering the case for the first U.S. interest-rate increase in almost a decade.

The MSCI Emerging Markets Index slid 0.4 percent to 821.78. The Russian ruble and Colombian peso led declines among developing-nation currencies, retreating with oil as ministers at a meeting of the Organization of Petroleum Exporting Countries showed few signs of trimming output. Brent crude fell to a six-year low.

Yellen, speaking at the Economic Club of Washington, said she’s increasingly convinced the economy is growing sufficiently to achieve labor-market improvement and higher inflation and warned that waiting too long to start increasing U.S. interest rates could force policy makers to raise them too quickly. The Fed’s near-zero benchmark borrowing costs have supported demand for riskier assets in developing nations, and a change in U.S. monetary policy is expected to lure money away as the dollar strengthens.

“It’s a done deal” that the Fed will raise interest rates at a policy meeting on Dec. 16, Bernd Berg, the London-based director of emerging-market strategy at Societe Generale, said by phone. “I don’t expect massive turbulence,” but “there’s room for EM to sell off,” he said.

Yield Spread

Currencies, stocks and bonds in developing economies are headed for a third year of losses on concern higher U.S. rates will trigger outflows as China’s slowdown curbs demand for raw materials. Emerging markets face another challenging year in 2016 because their growth outlook, while improving, “remains below potential,” JPMorgan Chase & Co. strategists wrote in a note Tuesday.

A Bloomberg gauge of 20 emerging-market currencies slipped 0.2 percent, trading within 0.2 percent of a record low. The premium investors demand to own developing-country debt over U.S. Treasuries narrowed two basis points to 394, according to JPMorgan Chase & Co. indexes.

The ruble weakened 1.3 percent, extending its decline to an eighth day. Derivatives traders are paring bets that the central bank will cut its key rate at its next meeting on Dec. 11 amid speculation sanctions on Turkish food imports will stoke inflation in Russia. Colombia’s peso fell 1.2 percent to a three-month low against the dollar.

Brazil, Egypt

The Ibovespa equity gauge declined 0.3 percent as Brazilian raw-material exporters slumped. President Dilma Rousseff will face impeachment proceedings in Congress, lower house speaker Eduardo Cunha said after the close of trading in Sao Paulo. The biggest exchange-traded fund tracking the country’s stocks rallied 2.4 percent in New York following the announcement.

The EGX Index rallied 3.5 percent, the most since May. The Egyptian benchmark jumped on speculation more foreign cash may return to the countryafter the central bank repaid $547.2 million owed to overseas investors.

Polish stocks fell the most in eastern Europe, pushing the WIG20 Index down 2 percent to the lowest since July 2009. Investors are wary of the government’s plan to underpin the economy with coal, piling on investment costs for some of the country’s largest utilities, according to Wood & Co. Brokerage.

India, China

India’s benchmark S&P BSE Sensex slid 0.2 percent, with software exporter Infosys Ltd. dropping the most in two weeks in Mumbai. South Africa’s JSE Africa All Share Index slid 0.7 percent. 

The Shanghai Composite Index closed 2.3 percent higher as financial companies rallied. Speculation has intensified that the nation’s central bank will add to the six interest-rate cuts since November last year amid a recent raft of indicators signaling a deepening economic slowdown, including falling exports, declining producer prices and slowing industrial output.

Nine of the 10 industry groups in the developing-nation stock benchmark declined Wednesday, led by raw-material stocks. The gauge has declined 14 percent this year and trades at 11.3 times projected 12-month earnings. That’s a 30 percent discount to the MSCI World Index of developed-nation stocks, which has slipped 0.8 percent in 2015.

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