Emerging Markets Drop as Dollar Strength Outweighs Oil's Advance

Parsing the April Fed Policy Debate
  • Fed minutes show some policy makers debated April rate move
  • Turkish lira erases gains as minister asks for rate cuts

Emerging-market stocks fell to a three-week low and currencies weakened as minutes from the Federal Reserve’s meeting last month highlighted disagreements among policy makers about the timing of U.S. interest-rate increases.

Turkish equities fell and the lira slid to the lowest level this month after Economy Minister Mustafa Elitas was quoted as saying the central bank should cut interest rates “radically.” South Africa’s rand erased its gains after Standard & Poor’s cut growth estimates for the country.

Emerging-market assets remained lower after minutes from the Fed’s meeting last month indicated that policy makers debated an April interest-rate increase, with several officials leaning against such a move because it would send the wrong signal and others saying it might be warranted. Fed Chair Janet Yellen calmed investors last week by reiterating caution in normalizing policy after several officials had suggested rates could rise more quickly. Low U.S. borrowing costs support emerging markets as a weaker dollar makes riskier assets more appealing.

“The uncertainty about the rate hike is still here, but at this point, there is nothing to suggest that Yellen is going to move faster than the market anticipates,” Quincy Krosby, market strategist at Prudential Financial, said by phone. “We are seeing the reiteration of a ‘lower for longer’ rhetoric when it comes to the pace of interest rate increase, and this is beneficial for emerging markets.”

The developing-nation stock benchmark retreated 0.5 percent to 809.03. The gauge has slumped 3.3 percent in April following a 13 percent surge last month. It’s up 1.9 percent this year and trades at 11.9 times 12-month projected earnings of its constituents. That compares with a 1.8 percent drop in the MSCI World Index, which is valued at multiple of 16.3.

The MSCI Emerging Markets Currency Index slipped 0.2 percent on Wednesday. The gauge surged by a record 5.2 percent in March and was up about 4 percent in the first quarter as investors returned to riskier assets.

Eight out of 10 industry groups in the MSCI Emerging Markets Index retreated Wednesday, led by financial and health care stocks. Turkish equities fell 1.8 percent, the most in two weeks and the lira retreated 0.3 percent. Brazilian stocks fell for the second time this week on speculation that chances are fading for a change in Brazil’s government that many investors expect to help put the economy back on track. The Ibovespa declined 2 percent, while the real gained 1.1 percent.

Ruble, Rupee

Chinese stocks fell from a three-month high, dragged down by banks and insurers. The Shanghai Composite Index slipped 0.1 percent. A gauge of financial shares in the CSI 300 Index dropped 0.7 percent for the steepest loss among 10 industry groups.

Russia’s ruble gained 1.4 percent and the Micex Index increased 0.2 percent as Brent crude surged 5.2 percent toward $39.84 a barrel. Oil rallied after U.S. crude stockpiles dropped from the highest level in more than eight decades as refineries bolstered operating rates.

The rupee weakened 0.3 percent as Indian Prime Minister Narendra Modi’s administration approved a proposal to cap states’ budget deficits as it looks to shrink Asia’s widest shortfall, the rupee weakened 0.4 percent. The rand fell 0.1 percent as S&P cut its 2017 growth forecast for South Africa to 1.8 percent from a previous estimate of 2.1 percent.

(Corrects company name in fourth paragraph.)
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