Emerging Markets Extend Rally as Oil, China Add to Fed Momentum

  • Peso leads advance among developing-nation currencies
  • Yield premium over Treasuries drops to lowest since April

Emerging-market assets rallied for a fifth day as crude oil extended gains above $50 a barrel and Chinese trade data eased concern that the nation’s economic slowdown is worsening.

Equity valuations rose to a one-year high as commodity producers led the benchmark index to its longest winning streak in two months. Brazil’s, the Russian ruble and the Mexican peso helped lift a gauge of currencies to a one-month high. Chinese stocks in Hong Kong capped the longest run of gains in nine years. Oman sold five- and 10-year bonds as the extra yield investors demand to hold emerging market debt rather than Treasuries fell to the lowest since April.

Emerging markets have rallied in the past week after U.S. jobs data missed forecasts, spurring speculation that the Federal Reserve will keep borrowing costs lower for longer. A jump in commodity prices and signs that China’s economy is on the mend helped underpin sentiment toward riskier assets. Exchange-traded funds targeting stocks in developing economies attracted more than $1 billion of inflows in the last two days, according to Markit Economics Ltd.

“Emerging-market sentiment has gotten a big boost from the Fed, which has led to a weakening of the dollar and helped flows,” said Maarten-Jan Bakkum, a senior strategist at NN Investment Partners in The Hague, who favors Indian shares. “Also, the Chinese trade numbers looked a bit better than expected. Higher oil prices always make investors more comfortable” about emerging markets, he said.

Stocks

Energy and raw-material stocks led gains in the MSCI Emerging Markets Index, which rose 0.8 percent to 842.38. While volatility has fallen to an 11-month low, a momentum indicator signaled stocks may be climbing too far, too fast. The 14-day relative-strength index rose above 70, a level that frequently precedes a reversal.

The developing-nation equity measure has advanced 6.1 percent this year and trades at 12.3 times its projected 12-month earnings. The MSCI World Index has advanced 2.2 percent in 2016 and is valued at a multiple of 16.3.

Shares in the Middle East gained, with benchmarks for Saudi Arabia and Abu Dhabi climbing more than 1 percent. Brent crude rose 2.1 percent to an eight-month high of $52.51 a barrel.

China Imports

The Hang Seng China Enterprises Index in Hong Kong rose 0.3 percent, advancing for a ninth day. Mainland markets will be closed for holidays for the rest of the week, while Hong Kong’s will shut on Thursday.

Chinese imports increased 5.1 percent from a year earlier in local-currency terms in May, ending a run of 16 monthly declines, a report showed Wednesday ahead of a two-day holiday in the nation. Economists predicted a 2.5 percent decrease, a Bloomberg survey showed.

The MSCI Emerging Markets Currency Index advanced 0.8 percent to the highest closing level this year. The ruble strengthened for a fifth day, advancing 1.6 percent to the strongest since November. The real added 2.2 percent, the best performance in developing nations.

South Africa’s rand climbed 1.2 percent after Fitch Ratings affirmed the nation’s investment-grade status with a stable outlook. The currency slid 0.5 percent earlier following a report showing the economy contracted more than forecast.

The zloty advanced 0.8 percent against the euro to the strongest in a month after Poland’s central bank kept its lending rate at 1.5 percent, in line with economists’ estimates.

Bonds

The extra yield investors demand to hold emerging market debt over Treasuries fell two basis points to 384, according to JPMorgan Chase & Co. indexes. The spread has narrowed 12 basis points this week.

Oman sold dollar bonds in the latest offering among issuers from the six-nation Gulf Cooperation Council that are tapping international markets to fund budget deficits following a slump in oil prices.

Local currency bonds advanced, with Russia’s 10-year yield falling five basis points to 8.65 percent.

South Korean bonds rose on a plan to create an 11 trillion won ($9.5 billion) fund to bolster finances at state lenders. The yield on three-year sovereign notes fell three basis points to 1.39 percent.

In Malaysia, 1MDB Energy Ltd.’s dollar bonds due May 2022 fell after Moody’s Investors Service withdrew its rating on the notes, citing “its own business reasons.” Malaysia’s troubled state investment company 1Malaysia Development Bhd. said Wednesday its liquidity position is “strong.”

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