Emerging-Markets Assets Decline as Investors Brace for Fed, MSCI

  • Russian currency weakens as central bank cuts interest rate
  • China H shares fall on bets MSCI to include mainland stocks

Emerging-market stocks and currencies declined, trimming weekly gains, as investors grew cautious before next week’s Federal Reserve meeting and MSCI Inc.’s annual market-classification review.

Chinese stocks traded in Hong Kong ended their longest winning streak since 2007 on speculation MSCI may include mainland shares in its benchmark index, reducing the allure of the so-called H shares. The Ibovespa fell the most in two months as Brazilian commodity companies including Vale SA declined with commodities. Russia’s ruble weakened as the central bank cut the main interest rate as projected. South Africa’s rand slid for a second day.

Developing-nation stocks and currencies had been rallying in the past three weeks as the weakest U.S. jobs data in almost six years prompted futures traders to rule out a Fed interest rate increase next week. Optimism evaporated in the last two days as investors speculated that the rally has gone too far and as the dollar rebounded. Stock volatility has jumped to the highest in five weeks before MSCI’s decisions on June 14 and the Fed announcement a day later.

“We are in a consolidation phase now,” said Tim Love, the investment director for emerging-market equities at Gam UK Ltd., which oversees about $130 billion. “The initial enthusiasm caused by the recent twist in the U.S. jobs numbers has waned. I wouldn’t be surprised if the dollar finds its floor and starts a modest rally.”

China, Brazil

The MSCI Emerging Markets Index dropped 1.6 percent to 823.82, the biggest drop since May 3. That pared this week’s advance to 0.9 percent and 2016 gains to 3.7 percent. The benchmark gauge trades at a valuation that’s 25 percent below developed-market stocks, compared with an average discount of 28 percent in the past 12 months.

The Hang Seng China Enterprises Index fell 2.2 percent, its first drop since May 26, as trading resumed after a holiday in Hong Kong. Investors speculated that an inclusion of mainland shares in the MSCI index would mean Hong Kong-traded equities would face more competition.

The Shanghai market will reopen on Monday, when May data for industrial output and retail sales are due. Reports on money supply and new loans may be released as early as Friday.

The Ibovespa declined 3.3 percent in Sao Paulo. Vale, the world’s largest iron-ore producer, slumped 4.8 percent. Petroleo Brasileiro SA, the state-controlled oil producer, declined 6.1 percent. The Bloomberg Commodity Index dropped 1 percent, while Brent crude dropped 2.7 percent to $50.54 a barrel.

The PX index fell 3.2 percent in Prague, led by a 5.7 percent drop for the secondary listing of Erste Group Bank AG, which has a 19 percent weighting in the Czech equity gauge. The Austrian lender’s shares, primarily traded in Vienna, tumbled for a third day to a four-month low after Uniqa Versicherungsverein Privatstiftung sold its 4.1 percent stake at a discount to market price.

The MSCI Emerging Markets Currency Index dropped 0.5 percent. The gauge rose 1.2 percent in the past five days, the best weekly performance since April.

The ruble weakened 1.4 percent against the dollar. The Bank of Russia cut its key rate by 50 basis points to 10.5 percent as estimated by 22 of of 42 surveyed by Bloomberg. With the economy in contraction since the start of 2015, there’s now a stronger case for monetary easing, according to ING Groep NV.

The rand declined 3 percent, leading losses among 24 emerging-market peers tracked by Bloomberg.

The premium investors demand to own emerging-market sovereign debt rather than U.S. Treasuries widened six basis points to 393, according to JPMorgan Chase & Co. indexes.

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