Emerging Assets Rally as Stimulus Outlook Supports Risk Demand

Anticipating Fed Actions Post Brexit Decision
  • Brexit concern softens as odds of U.S. rate increase diminish
  • Currencies from South Africa to Brazil advance for second day

Emerging-market stocks and currencies rose for a second day as speculation mounted that the Federal Reserve will pause its tightening cycle and other nations will follow South Korea’s lead in increasing stimulus after Britons voted to leave the European Union.

The developing-nation equity benchmark jumped the most since late March, further narrowing the decline posted in the wake of last week’s U.K. referendum. The Kospi Index advanced after South Korea announced plans for extra budget spending. The Ibovespa rallied as better-than-forecast labor data added to optimism that Brazil will pull out of its worst recession in a century. Aviation stocks dragged down Turkey’s main stock gauge after a deadly terror attack on Istanbul’s main airport. The yuan advanced for the first time in a week as Chinese authorities stepped in to support the exchange rate.

Futures traders are now betting the Federal Reserve won’t raise borrowing costs in the wake of the British vote, underpinning support for riskier emerging-market assets. Gold was selling for around the highest prices in two years as the unresolved time-line for the U.K.’s exit from the EU stoked concern that governments around the world will need to bolster their economies to guard against an economic downturn.

“The selloff after Brexit has brought down valuations, so people are finding some good bargains,” said Guillaume Tresca, senior emerging-market strategist at Credit Agricole CIB in Paris. “Investors have priced in very sharply the expectations for further Fed hikes. Brexit means there will be no hike for some more time.”

For more on the shrinking expectations of a Fed interest hike, click here.

The premium investors demand to own emerging-market debt over U.S. Treasuries narrowed 12 basis points to 391 basis points, falling for a second day, according to JPMorgan Chase & Co. indexes.

The MSCI Emerging Markets Index rallied 2.1 percent to 821.82, trimming its decline to 1.6 percent since the close of trading on June 23 before the Brexit vote triggered a global selloff. All 10 industry groups rose in the index Wednesday, led by raw-material stocks.

Russia, Brazil

The Micex Index gained 1.7 percent in Moscow. Gazprom PJSC, the natural gas exporter, said it’s set to buy 3.6 percent of its own stock from Vnesheconombank for about 130 billion rubles ($2 billion) as the government bails out its troubled development bank.

The Ibovespa jumped 2 percent in Sao Paulo. The equity gauge advanced after data showed Brazil’s unemployment rate remained unchanged in May, whereas economists expected it to increase.

The Shanghai Composite Index added 0.7 percent to a three-week high. South Korea’s Kospi rallied 1 percent after the government announced a 20 trillion won ($17 billion) monetary stimulus package on Tuesday.

The Borsa Istanbul 100 Index fell 0.3 percent. Airport operator TAV Havalimanlari Holding AS tumbled 6.5 percent, the most this year, in the wake of an attack on Istanbul’s Ataturk Airport in which at least 40 people were killed and 200 wounded. Turkish Airlines fell 2.7 percent.

Currencies

The MSCI Emerging Markets Currency Index advanced 0.8 percent. The South African rand appreciated 2.5 percent against the dollar as Reserve Bank Governor Lesetja Kganyago warned that the U.K.’s exit from the EU “will slow the South African economy from the weak growth that we already have.” The dollar declined against a basket of currencies.

Brazil’s real gained 2.4 percent. Colombia’s peso rallied 2.3 percent. Mexico’s currency strengthened 1.9 percent.

The South Korean won rose 1 percent. The currency has weakened 1.5 percent this quarter, headed for its first three-month loss since September.

Russia’s ruble rose 0.3 percent as the central bank’s research department forecast fourth-quarter growth at about 0.5 percent, compared to 0.2 percent in the third quarter. Oil, the country’s biggest export, added 2.7 percent to $49.88 a barrel in London.

In China, the yuan rose for the first time in five days after the People’s Bank of China were said to intervene in the market to maintain stability in the currency. The currency strengthened 0.2 percent against the dollar.

The rupiah gained 0.1 percent as Indonesia’s central bank said it will intervene in the foreign-exchange market to prevent the currency from gaining too much from a possible increase in inflows following a recently passed tax amnesty law.

Bonds

Bonds in developing-market countries most sensitive to the U.K.’s departure from the European Union continued to pare losses triggered by the referendum’s result.

Yields on Turkish 10-year notes fell 10 basis points to 9.3 percent to drop below where they were prior to the British referendum result on June 24. Polish bonds gained for a third day, pushing the yield on 10-year debt to 2.93 percent, the lowest in almost six weeks.

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