Emerging Stocks Rise After Fed Liftoff; Currencies Erase Losses

  • Technology companies rise most among 10 industry groups
  • Gauge of currencies increases after reversing decline

Emerging-market stocks rose the most in two months while currencies strengthened as the Federal Reserve increased U.S. interest rates for the first time in almost a decade and signaled a gradual pace of subsequent increases through 2016.

The MSCI Emerging Markets Index advanced 1.4 percent to 790.34 in New York on Wednesday. A Bloomberg gauge tracking 20 currencies was little changed after reversing a 0.5 percent decline. Gains in the Turkish lira and South Korean won offset declines in Russia’s ruble and the Brazilian real.

“The uncertainty around the timing of the Fed is over, and the markets will focus on what they should be focusing on -- the pace and the trajectory of the tightening cycle, the situation in China, the commodity sectors and all the factors affecting the sentiment in emerging markets,” Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, said by phone from London. “This is net positive.”

The cost to hedge against future declines in emerging-market equities fell the most in three months after the Fed’s interest-rate announcement. The CBOE Emerging Markets ETF Volatility Index, the benchmark for options prices on developing-nation stocks, tumbled 11 percent.

Investors had fled emerging markets in the run-up to Wednesday’s Fed move. Stocks are heading for their worst annual performance since 2011 and the currency gauge is set for its biggest slide since 1997. Now traders will shift their focus to the pace of future U.S. interest-rate increases. A gradual move would help sustain the appeal of higher-yielding assets in developing nations.

Fed Move

Fed policy makers set the new target range for the federal funds rate at 0.25 percent to 0.5 percent, up from zero to 0.25 percent. They separately forecast an appropriate rate of 1.375 percent at the end of 2016, the same as September, implying four quarter-point increases in the target range next year, based on the median number from 17 officials.

While emerging markets will probably remain volatile as the Fed increases U.S. borrowing costs, strategists at Goldman Sachs Group Inc. and Bank of America Corp. say the worst could be over for developing nations. Much will depend on how quickly China can revive economic growth and the ability of companies from Brazil to Turkey and Russia to service their $1.4 trillion of dollar debt. Slumping raw-material prices, which have pushed the Bloomberg Commodity Index to the lowest since 1999, also may weigh on assets in some countries.

China, Commodities

“Beyond the Fed, the two other drivers for emerging markets are China and
commodity prices. We are in a wait-and-see mode. We continue to be cautiously
positioned into 2016,” Alejo Czerwonko, an emerging-markets strategist at UBS Wealth Management, which oversees the investment strategy for $1.9 trillion in assets, said by phone. “We are in a wait-and-see mode. We continue to be cautiously positioned into 2016.”

All 10 industry groups in the MSCI Emerging Markets Index rose, led by a 2.3 percent advance in technology stocks. The equity benchmark trades at 11.1 times the projected 12-month earnings of its members, below the average price-to-earnings ratio in the past 10 years and a 30 percent discount to the MSCI World Index of developed-nation shares.

The Ibovespa gained 0.3 percent in Sao Paulo after reversing a decline of as much as 1.7 percent. The real weakened 0.3 percent against the dollar. Brazil’s credit grade was cut to junk by Fitch Ratings, which became the second major ratings company to strip the country of its investment grade this year.

Equities from Dubai to Indonesia added 1.7 percent or more. Chinese shares in Hong Kong jumped 2.1 percent after trading at the cheapest relative to global peers in 12 years. Russia’s Micex index added 0.7 percent, ignoring a slide in Brent crude.

Lira Rally

The lira rallied 1 percent against the dollar, the most among developing-nation currencies. Moody’s Investors Service on Tuesday cut the country’s rating outlook to negative, citing a “prolonged” period of slow growth and increasing political pressures. Colombia’s peso slumped 0.6 percent, while the Russian ruble fell 0.6 percent.

Risk perceptions toward emerging markets also improved in the credit markets. The premium investors demand to own developing-country debt over U.S. Treasuries narrowed two basis points to 414, according to JPMorgan Chase & Co. indexes.

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