Emerging-Market Rally Halts on Fed's Hawkish Tone, Oil Decline

  • Equity gauges in Brazil, South Africa decline at least 1.5%
  • Energy stocks retreat as U.S. crude inventories climb

Emerging-market stocks ended a five-day advance and currencies weakened as some Federal Reserve officials adopted a more hawkish tone and the dollar rose, prompting speculation that the best monthly rally in five years may have been excessive.

Brazil’s and South Africa’s equity gauges each fell at least 1.5 percent and South Korea’s won declined from a three-month high on concern higher U.S. borrowing costs will draw investment away from riskier assets. The ruble and real retreated as Brent crude dropped the most in two weeks after U.S. data showed oil supplies rose to the highest level in more than eight decades. Hungarian bonds and the forint fell after the central bank unexpectedly cut interest rates on Tuesday.

The chance that the U.S. central bank will raise interest rates by the middle of the year has increased this week, Fed futures trading indicates, as San Francisco and Atlanta Fed presidents said higher borrowing costs may be warranted as soon as April. Emerging-market stocks entered a bull market last week and gauges in Thailand, Malaysia and Indonesia have surged more than 10 percent in dollar terms over the last three months.

“Some are saying the rally has gone too far and with the most recent Fed speakers turning a little more hawkish there is a risk of a reversal,” said Michael Wang, a strategist at hedge fund Amiya Capital LLP in London, who likes Mexican and Indian stocks. “The risk-reward isn’t favorable and that there is more risk of a pullback here. We are positioned more defensively.”

Valuation Discount

The MSCI Emerging Markets Index fell 1.1 percent to 821.71, after rising 5 percent in the previous five days. The gauge has rallied 11 percent this month. All 10 industry groups fell Wednesday, with measures of energy and raw-material companies each declining more than 1.7 percent. 

The Bloomberg Commodity Index fell 2 percent as Brent crude declined 3.2 percent to $40.47 a barrel in London. Petroleo Brasileiro SA slid 4.1 percent in Sao Paulo, and Russian energy producers Gazprom PJSC and Rosneft OJSC each slumped more than 2 percent.

The MSCI developing-nation index gained last week after the Fed released comments that indicated policy makers would scale back the number of planned rate increases in 2016. The benchmark measure is up 3.5 percent this year, compared with a 1.9 percent drop in advanced-nation stocks, and trades at 11.7 times the projected 12-month earnings of its members. That’s a 26 percent discount to the MSCI World Index’s multiple, data compiled by Bloomberg show.

Currencies Weaken

South Africa’s FSE/JSE Africa All Share Index declined 1.5 percent while the Borsa Istanbul 100 Index in Turkey dropped 1.7 percent. Markets in Jakarta and the Hang Seng China Enterprises Index of mainland shares listed in Hong Kong each fell at least 0.3 percent. Shares in Nigeria slumped after the central bank reversed its own policy stance unexpectedly raised interest rates on Tuesday.

A Bloomberg gauge of 20 emerging-market currencies declined 0.7 percent, paring its gain this month to 4.3 percent as the dollar extended its longest winning streak in a month. Brazil’s real dropped 2.7 percent against the dollar, the biggest decliner among 24 emerging-market currencies tracked by Bloomberg. The ruble weakened 1.8 percent.

South Korea’s won slid 0.6 percent, its biggest decline in two weeks. The South African rand weakened 0.9 percent, while Hungary’s forint fell 0.8 percent.

Yield Spread

The premium investors demand to own emerging-market debt over U.S. Treasuries widened nine basis points to 405, according to JPMorgan Chase & Co. indexes.

Sovereign bonds in Asia fell, with the South Korean 10-year yield rising two basis points to 1.86 percent and that on the similar-maturity Taiwanese notes falling four basis points to 0.81 percent. The yield on Russia’s 10-year securities increased 16 basis points to 9.2 percent.

Hungarian bonds rose a day after the central bank unexpectedly cut borrowing costs, with the yield on the 10-year bonds falling below 3 percent for the first time in more than year.

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