Emerging Markets Cheer Fed as Currencies, Stocks Jump

Morning Meeting: BlackRock's Emerging Market View
  • Developing-nation stocks erase 2016 loss as rally resumes
  • Local political issues taking more prominent role in markets

Emerging markets rallied as the Federal Reserve’s dovish turn boosted demand for riskier assets and Brent crude’s advance above $41 a barrel pushed energy stocks to a four-month high.

A gauge of 20 developing-nation currencies rose to a four-month high after U.S. policy makers signaled two interest-rate increases this year, down from four forecast in December. The real strengthened the most since September on renewed speculation that there will be a change in Brazil’s government. South Korea’s won advanced the most in four years. The MSCI Emerging Markets Index traded within 1.2 percent of a bull market.

“The primary beneficiary of yesterday’s move was emerging markets,” Rick Rieder, BlackRock Inc.’s chief investment officer of global fixed income, managing assets valued about $1.1 trillion, said at an event in New York. “To the extent that the dollar is not going to be in persistent appreciation, we think emerging markets benefit. That is a winner.”

As much as the Fed and oil drive emerging-market assets, local politics have become a more influential factor lately, whipsawing investors. Currencies and stocks in Brazil and South Africa fluctuated wildly this week as the leadership of both presidents came under attack.

‘Political Noise’

After being largely ignored by investors during the boom years for developing nations, politics are once again influencing markets as the economic slowdown uncovers the fragility of institutions and policies in some of these countries.

“Political noise has increased this year,” said Roxana Hulea, an emerging-market strategist at Societe Generale in London. “For clients to trade around is very tricky. It’s very difficult to factor that in.”

The Fed decision Wednesday to flag fewer future interest-rate increases came after global finance ministers and central-bank governors agreed in Shanghai last month to use additional policy tools to strengthen growth. Lower-than-expected U.S. rates sap the dollar’s strength and reduce the risk that investors will pull money from less developed economies as they did at the start of the year.

Positive Mood

The Fed’s less aggressive rate path comes amid rising expectations for further easing by the Bank of Japan and more monetary stimulus put in place by the European Central Bank this month. Bank Indonesia lowered borrowing costs for a third month on Thursday, sending bond yields to an 11-month low.

Brent crude jumped 3 percent to $41.54 a barrel in London. The Bloomberg Commodity Index rallied 2.1 percent to the highest level this year.

“The mood in emerging markets has taken a positive turn,” said Koon Chow, a currency strategist at Union Bancaire Privee Ubp SA in London, who favors the Malaysian ringgit and Indonesian rupiah. “The Fed’s actions will take the steam out of the dollar, which means that commodity prices will improve and currencies of commodity exporters will be supported.”

The emerging-market currencies gauge rose for a second day, adding 1.6 percent. It’s up 3.8 percent since Dec. 31 after plunging more than 30 percent over the previous three years.

Impeachment Bets

The real strengthened 3 percent, extending a monthly advance to 11 percent, and the Ibovespa stock gauge surged the most since October 2009. Brazilian assets rallied as bets on an impeachment of President Dilma Rousseff spurred optimism that a new administration could halt a political quagmire that’s prevented Congress from focusing on pulling Latin America’s largest economy out of recession.

South Africa’s rand strengthened 4.6 percent as the central bank raised the benchmark interest rate to 7 percent from 6.75 percent. The rand started reversing losses on Wednesday after a deputy minister said he was offered the finance minister’s post by President Jacob Zuma’s friends, allegations that may undermine the embattled president’s power.

The premium investors demand to own emerging-market debt over U.S. Treasuries narrowed two basis point to 417, according to JPMorgan Chase & Co. Indexes.

MSCI’s gauge of developing-nation equities rose 3.3 percent. All 10 industry groups advanced, led by material and energy stocks. Thursday’s rally erased the index’s 2016 decline, pushing it 2.9 percent higher for the year. It trades at 11.7 times projected 12-month earning of its members. That compares with a multiple of 15.9 for the MSCI World Index, which has slipped 1.4 percent this year.

The Hang Seng China Enterprises Index of mainland stocks listed in Hong Kong advanced 2.4 percent to a two-month high as PetroChina Co. halted a three-day losing streak. The Shanghai Composite Index rose 1.2 percent.

(Corrects Rieder's company affiliation in third paragraph.)
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