Emerging Currencies Rally With Oil as ECB Boosts Risk Appetite

  • Russia's ruble, South African rand gain as crude tops $40
  • Currency volatility rises, highlighting fragility of rally

Emerging-market stocks and currencies rose for a second week and bonds rallied as oil’s rebound above $40 a barrel and European stimulus boosted demand for riskier assets.

A gauge of developing-nation currencies climbed to a three-month high as China strengthened the yuan’s fixing, spurring a surge in the onshore currency. Russia’s ruble, and South Africa’s rand each jumped at least 1 percent as oil’s advance boosted sentiment toward commodity exporters. Brazil’s real strengthened for a fourth day and the Ibovespa advanced amid mounting speculation that there will be a change in government. Hungarian equities rallied to a six-year high, leading an advance in eastern European stocks toward their highest close since November.

While monetary easing from the European Central Bank on Thursday encouraged inflows to higher-yielding assets, investors are watching the Federal Reserve as speculation gathers momentum that it will raise U.S. interest rates this year. Futures traders see about a 77 percent chance of an interest-rate increase by the Fed’s December policy meeting. Chinese factory production and foreign direct investment data are also forecast to provide further evidence of a slowdown in the world’s second-largest economy.

Currencies Strengthen

“Investors are realizing that the ECB is still able to ease further and that is helping sentiment toward emerging markets,” said Guillaume Tresca, a strategist at Credit Agricole SA in Paris, who recommends selling the rand and buying the Turkish lira. “The Fed March meeting next Wednesday will be a reminder that it is on course to normalize monetary policy later this year, so we could see some profit taking.”

A gauge tracking 20 exchange rates climbed 0.8 percent to close at 71.09, pushing its gain for the week to 1.3 percent. Volatility in developing-market currencies, a measure of risk used in pricing options, fell 0.3 percent in the past five trading days following a 13 percent drop in the past three weeks, according to a JPMorgan Chase & Co. index. 

The MSCI Emerging Markets Index rose 1.3 percent to the highest level this year. The advance wiped out the stock benchmark’s decline for 2016. Brent crude jumped almost 1 percent to $40.44 a barrel. The Bloomberg Commodity Index of 26 raw materials added 0.7 percent, pushing its five-day gain to 2 percent.

Russia’s ruble appreciated 2.3 percent, dipping below 70 per dollar for the first time this year. A four-week rally in the currency is giving policy makers room to resume a cycle of interest-rate cuts, with wagers for a reduction in borrowing costs widening to the highest level this year on Friday.

Rand, Real

South Africa’s rand strengthened 1.3 percent, extending gains for a second week. The Brazilian real gained 1.2 percent against the dollar, pushing its gain to 4.6 percent this week, the most among 24 emerging currencies tracked by Bloomberg.

China’s onshore yuan rose 0.2 percent on Friday ahead of key data on Saturday and an annual press conference by People’s Bank of China Governor Zhou Xiaochuan and his top deputies.

Hungarian equities advanced 1.4 percent to the highest level since January 2008. Turkey’s Borsa Istanbul 100 Index climbed for a 10th straight day, its longest winning streak since 2013. It advanced 0.5 percent to the highest level in more than three months, taking the weekly gain to 2.8 percent.

Stock Valuations

The Ibovespa advanced 0.1 percent in Sao Paulo. Lender Banco do Brasil SA led gains in the benchmark, rallying 6.3 percent.

The Shanghai Composite Index rose 0.2 percent, stemming a 2.2 percent drop for the week as state intervention failed to regain investor confidence. Shanghai Pudong Development Bank Co. slumped after a stock-sale plan. The Hang Seng China Enterprises Index of mainland stocks listed in Hong Kong advanced 1.7 percent, erasing its decline for the week.

All 10 industry groups in the MSCI Emerging Markets Index gained this week, led by technology and industrial companies. Developing-nation stocks have climbed 0.9 percent this year and are valued at 11.6 times 12-month estimated earnings. The MSCI World Index has declined 2.2 percent in 2016 and is valued 15.8 times earnings.

Bond Premium

The premium investors demand to own emerging-market debt over U.S. Treasuries narrowed seven basis points to 411.

JPMorgan Chase cut “several” emerging-market credit traders, including global head Robert Milam, as volatility in the asset class bled into this year, according to people with knowledge of the moves.

South Korea’s 10-year government notes fell this week after the central bank refrained from cutting the benchmark interest rate from a record low. The yield rose five basis points to 1.92 percent, Korea Exchange prices show.

Russian government bonds fell, trimming the second-best rally in emerging markets this month. The yield on five-year sovereign OFZ bonds advanced five basis points to 9.4 percent. They’re still down 154 basis points since touching a 2016 high in January.

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