Emerging Markets Advance as Receding Brexit Odds Ease Poll Panic

  • Bookmaker odds of U.K. leaving European Union around 28%
  • Prague Stock Exchange leads advance in eastern Europe

Emerging-market assets advanced for a fourth day as confidence grew the U.K. may avoid a vote to leave the European Union. 

Stocks in eastern Europe, with the most to lose in the event of Brexit, rallied as bookmakers’ odds gave a little more than a one-in-four chance of a “leave” verdict. Chinese stocks traded in Hong Kong led gains in Asia. The rand strengthened as inflation in South Africa unexpectedly slowed. The real rose as the Brazilian government won a Senate vote. Russian government-bond yields fell to the lowest level in almost two years.

Even as opinion polls signal the race in the U.K. referendum on Thursday is too close to call, financial markets are relying on a victory for the “remain” campaign whose odds have shortened in the betting markets. Riskier assets including developing-nation stocks and currencies are gaining as investors speculate last week’s panic over the potential for Brexit was overdone. The Federal Reserve’s repeated assertions that it won’t rush in to raising interest rates are also buoying the sentiment. 

“Emerging markets have mainly been benefiting from a more dovish Fed,” said Maarten-Jan Bakkum, a senior strategist at NN Investment Partners in The Hague, who favors Indian shares. They “are also helped by the market perception of lower Brexit risk.”

The MSCI Emerging Market Index rose 0.5 percent to 829.33, adding to a 3.2 percent gain over the last three days. All 10 industry groups advanced. Developing-nation equities trade at a 25 percent discount to advanced-nation shares, compared with an average 27 percent in the last 12 months.

The PX Index in Prague advanced 1.2 percent, leading gains in eastern Europe. Polish stocks rose for a fourth day. A gauge of emerging European, Middle East and African shares advanced 1 percent to the highest level in almost two weeks. South Africa’s equity benchmark advanced 1.1 percent to a two-week high.

The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong rose 0.7 percent for a fourth day of gains, and the Shanghai Composite gauge climbed 0.9 percent, the most in a week. In the Philippines, Energy Development Corp., a geothermal power producer, jumped 6.5 percent while the nation’s mining shares dropped after a self-proclaimed anti-mining crusader was named environment secretary.

Currencies

Emerging-market currencies show a higher correlation than stocks with an index tracking the percentage of voters favoring a “remain” vote. That means currencies are more likely to extend their rally if Brexit is avoided, while the move in equities would also be influenced by factors such as global-growth concerns and the path of U.S. interest rates, according to Simon Quijano-Evans, chief emerging-market strategist at Commerzbank AG in London.

Brazil’s real strengthened 1 percent, boosted by the government’s victory in a Senate vote that increased confidence the new administration has enough support to shore up the country’s finances. The rand strengthened 0.6 percent. South Africa’s inflation rate dropped to 6.1 percent from 6.2 percent a month earlier. The median of 21 economist estimates compiled by Bloomberg had predicted an acceleration to 6.4 percent.

Poland’s zloty and Romania’s leu led gains in Eastern Europe. The ruble weakened 1.7 percent as oil, Russia’s biggest export, retreated. Turkey’s lira gained 0.6 percent as central bank officials were said to tell economists at a meeting in Ankara that rate cuts can’t continue at same pace.

Bonds

The premium investors demand to own emerging-market debt over U.S. Treasuries was unchanged at 390 basis points, according to JPMorgan Chase & Co. indexes.

Russian bonds climbed as the rise in oil and prospects of further interest-rate cuts bolstered the appeal of assets in the world’s biggest energy exporter. The yield on five-year ruble-denominated notes declined eight basis points to 8.87 percent, the lowest since July 2014.

South African bonds gained for a sixth day, pushing the yield on 10-year debt down 10 basis points to 8.88 percent.

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