Emerging Assets Rally for Fourth Day as Yellen Reassures Markets

Is a September Rate Hike Off the Table?
  • All 10 industry groups rise, led by raw-material stocks
  • Traders scale back bets for July U.S. rate increase to 20%

Emerging-market stocks rose for a fourth day with currencies after Federal Reserve Chair Janet Yellen eased concern about U.S. economic growth and premature increases in interest rates. 

Equities posted the biggest gain since April while a gauge of currencies climbed to a one-month high. South Korea’s won posted its biggest gain in almost six years as trading resumed after a holiday in Seoul. Russia’s ruble strengthened with the Mexican peso as Brent crude sold for the highest price since October. The premium investors demand to hold developing-nation debt over Treasuries fell for a second day.

Mounting speculation that the Fed will keep U.S. interest rates lower for longer has fueled gains in emerging markets since data on Friday showed U.S. employers added the fewest workers in May since 2010. While Yellen said Monday that the employment numbers were disappointing, the economy was making progress and that gradual rate increases are appropriate.

Tuesday’s rally was “driven by the weaker dollar following payrolls data on Friday and the measured comments from Yellen,” said Michael Wang, a strategist at hedge fund Amiya Capital LLP in London, who favors Indian, Mexican and South Korean stocks. “As long as the growth disappointment is not too severe and Chinese economic growth looks stable, then emerging markets can probably continue to rally.”

Fed Odds

While traders see virtually no chance of a move this month, developing nations may face headwinds from Chinese data on Wednesday that economists predict will show overseas shipments declined further. Bearish bets on the biggest exchange-traded funds investing in emerging markets climbed to the highest since July 2014.

The odds of a U.S. interest rate increase by July fell to 20 percent from 53 percent a week ago, according to Fed futures trading. The Bloomberg Dollar Spot Index slid 0.4 percent to the lowest close in a month.

The MSCI Emerging Markets Index rose 1.5 percent to 835.90. All 10 industry groups advanced. Equity benchmarks in Russia, Poland, Dubai and South Korea climbed at least 1.3 percent. 

Russian stocks gained for a second day with Sberbank PJSC, Russia’s largest lender, climbing 4.5 percent to a record high. Brent crude rose 1.8 percent to $51.44 a barrel.

Short Interest

The developing-nation equity measure has increased 5.3 percent this year and trades at 12.2 times its projected 12-month earnings. While that’s its most expensive level in a year, it’s still trading at a discount to the MSCI World Index, valued at a multiple of 16.2 after gaining 1.9 percent in 2016.

Bearish bets on the Vanguard FTSE Emerging Markets ETF have increased to 2.4 percent of outstanding shares, the highest level since July 2014, from 0.4 percent in late April, according to data compiled by Markit Ltd. and Bloomberg.

The MSCI Emerging Markets Currency Index added 0.5 percent. The ruble strengthened 1 percent. Brazil’s real gained 0.8 percent.

Lira, Rupee

South Africa’s rand advanced for a sixth day, its longest winning streak since March 2014. The won jumped 1.8 percent.

The Turkish lira rose 0.3 percent after falling as much as 0.2 percent. A car bomb targeting a police vehicle in Istanbul killed 11 people and wounded 36, stoking security concern for a country on edge over resurgent Kurdish militant violence and Islamic State attacks.

India’s rupee strengthened 0.3 percent in its fourth day of gains. Central bank Governor Raghuram Rajan left interest rates unchanged in line with forecasts and said a decision about his future would be reached after discussions with the government.

The yuan posted its biggest two-day drop versus peers since February, spurring speculation that China is weakening it to counter a slowing economy. The yuan has fallen 0.8 percent against a trade-weighted basket this week to the lowest level since October 2014. The central bank cut its reference rate against the dollar by the most in a week on Tuesday.

The extra yield investors demand to own emerging-market debt over U.S. Treasuries decreased three basis points to 387, according to JPMorgan Chase & Co. indexes.

Russia’s 10-year bond gained for a third day, sending the yield down two basis points to 8.7 percent, the lowest since July 2014. The rate on similar-maturity Polish securities fell four basis points to 3.15 percent.

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