Emerging-Market Assets Advance on Stimulus Optimism, Fed Outlook

Where to Invest in a Brexit World
  • Currencies gain as traders cut bets Fed to raise rates in 2016
  • Premium over U.S. Treasuries narrows first time in three days

Emerging-market assets rose for the first time in three days as the prospect of stimulus from South Korea and Japan and the diminished likelihood of an increase in U.S. interest rates eased concern about the fallout from the U.K.’s decision to leave the European Union.

The MSCI Emerging Markets Index posted its biggest gain in a week and the premium investors demand to own developing-nation sovereign debt rather than U.S. Treasuries narrowed for the first time since Thursday as bets declined that the Federal Reserve will raise U.S. borrowing costs this year. Developing-nation currencies strengthened against the dollar, with oil-producing nations including Russia and Colombia among the biggest winners as crude prices advanced.

Central banks and governments from South Korea to Italy have rushed to defend their economies with stimulus packages and support for banks after $3.6 trillion was wiped off the value of global equities in the wake of Britain’s referendum. The probability of a Fed interest-rate increase has fallen, with some now forecasting cuts, bolstering speculation that riskier assets in emerging markets will benefit from a weakening dollar.

“The risk of capital outflows and tighter financial conditions in emerging markets comes down when the Fed doesn’t hike,” said Maarten-Jan Bakkum, a senior strategist at NN Investment Partners in The Hague who favors Indian shares. “The window for emerging markets to outperform remains open.”

Fed Odds

Traders cut the odds of a U.S. interest-rate increase by Dec. 31 to 10 percent, compared with a probability of 74 percent at the end of last month, according to data compiled by Bloomberg based on Fed fund futures. The probability of a reduction by year-end rose to 12 percent.

South Korea announced a stimulus package of more than 20 trillion won ($17 billion), while the Nikkei newspaper reported a similar plan has been proposed in Japan. EU officials are holding talks with the Italian government on measures to bolster the nation’s banks following the U.K. vote last week.

Stocks

The MSCI Emerging Markets Index advanced 1.3 percent to 805.24, after slumping 4.9 percent the previous two days. All 10 industry groups in the index rose Tuesday, led by consumer stocks.

Equities in Hungary rebounded 3.3 percent, while Czech and Polish benchmarks each added at least 1.3 percent. Egyptian shares advanced for a second day after plunging 5.5 percent on Sunday. Polish consumer goods distributor Eurocash rose the most in a month after being upgraded by Wood & Co.

Russia’s Micex Index added 0.8 percent as Brent crude rose 3 percent, helping fuel a recovery in steelmaker and bank stocks, including Severstal PJSC and Sberbank PJSC.

The Ibovespa jumped 1.6 percent in Sao Paulo, led by Itau Unibanco Holding SA and the Brazilian state-controlled oil producer Petroleo Brasileiro SA.

Istanbul-traded stocks rallied 2.4 percent, halting their two-day slide. President Recep Tayyip Erdogan ended a six-year rift with Israel and unexpectedly moved to mend ties with Russia, as Turkey attempts to draw a line under diplomatic confrontations that have sapped its economy.

Currencies

The MSCI Emerging Markets Currency Index rose 0.7 percent after tumbling 1.9 percent in the past two trading days. Brazil’s real strengthened 2.7 percent against the dollar. The ruble appreciated 2.3 percent. Colombia’s peso gained 2.6 percent. The zloty climbed 0.9 percent versus the euro.

The rupiah posted its biggest gain in three weeks, rising 1.2 percent as the Indonesian parliament approved a tax amnesty that the government said will draw in billions of dollars needed to finance a widening budget deficit.

The premium for emerging-market debt over Treasuries narrowed four basis points to 407, according to JPMorgan Chase & Co. indexes.

South African bonds maturing in December 2026 rose, cutting the yield 24 basis points to 8.89 percent. The yield on Hungarian 10-year notes declined seven basis points to 3.19 percent.

Kuwait’s Burgan Bank SAK mandated HSBC Holdings Plc, Standard Chartered Plc, National Bank of Abu Dhabi PJSC, Emirates NBD PJSC and Societe Generale SA among others as lead arrangers for a potential benchmark bond offering, according to two people familiar with the plans, who asked not to be identified because the information isn’t public.

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