Emerging Markets Rebound as Fed Urgency Fades Amid Brexit Angst

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Englander: Sterling Now an Emerging Markets Currency
  • South Korea’s won leads developing-nation currencies higher
  • Fed minutes show officials losing confidence in need to hike

Emerging-market stocks and currencies rebounded on further evidence the Federal Reserve will refrain from tightening policy anytime soon as Britain’s vote to leave the European Union clouds the outlook for global growth.

A gauge of developing-nation equities ended a two-day decline as benchmarks from Poland and Hungary rallied more than 1.2 percent and energy companies advanced even as oil fell. South Korea’s won led an advance in currencies for the first time this week and Polish bonds retreated as policy makers kept interest rates on hold for a 16th month. Minutes of the Fed’s June 14-15 meeting released Wednesday showed officials were losing confidence in the U.S. economy’s ability to withstand an interest-rate hike as they awaited Britain’s referendum a week later.

Developing-nation assets witnessed wide swings in the aftermath of the June 23 U.K. vote as investors assessed its impact on the world economy and speculated that major central banks will add stimulus. Concerns about China’s growth outlook eased on Thursday as data showed an unexpected increase in the country’s foreign-exchange reserves last month. Franklin Templeton bond fund manager Michael Hasenstab said emerging assets are being “mispriced” by markets and are in a strong position to weather global shocks.

“The Fed minutes confirm the market impression that it will be a long time until they will be ready to do anything on rates,” said Anders Svendsen, an analyst at Nordea Bank A/S in Copenhagen. “The Chinese data is definitely positive. The People’s Bank of China will probably take it as a sign that they can continue to allow the yuan to weaken gradually.”

The MSCI Emerging Markets Index rose 1 percent to 826.99, extending a rally this year to 4.1 percent. The MSCI Emerging Markets Currency Index advanced 0.4 percent, its first increase in four days.

Stocks

All 10 industry groups in the MSCI emerging-markets stock index advanced, as a gauge of healthcare companies jumped 1.8 percent, the most since June 29.

Energy producers led the Hang Seng China Enterprises Index of mainland companies trading in Hong Kong higher. The gauge halted a two-day slide to jump 1.2 percent. The Shanghai Composite Index was little changed, after a four-day gain that sent it to an 11-week high on Wednesday.

Samsung Electronics Co. reported its biggest operating profit in more than two years. The world’s largest maker of phones and memory chips climbed 2 percent and was the biggest contributor to MSCI’s measure of developing-nation shares.

Brazil’s Ibovespa index rose for a second straight day with Petroleo Brasileiro SA among the biggest gainers. Markets in Malaysia, Indonesia, Pakistan and the Middle East remained shut.

Currencies

The won advanced 1 percent against the dollar. Russia’s ruble declined 0.6 percent. Union Bancaire Privee said investors are shifting into emerging-market currencies outside Europe in the aftermath of Britain’s vote.

Bonds

Polish bonds fell, with the yield on five-year notes climbing six basis points to 2.25 percent. New central bank Governor Adam Glapinski kept borrowing costs unchanged as he stressed the importance of maintaining financial stability in the wake of the Brexit concern.

Most other developing-nation bonds climbed, with yields on South African 10-year notes dropping four basis points to 8.76 percent and yields on similar-maturity Russian debt retreating for the first day this week.

Fitch Ratings warned in a report that emerging-markets face further downgrades this year because public and external finances in many commodity-exporting countries are not yet aligned to lower oil prices. The ratings provider downgraded 15 borrowers globally in the first half of the year, mostly in developing countries.

The premium investors demand to own emerging-market bonds rather than U.S. Treasuries narrowed two basis points to 381, according to JPMorgan Chase & Co. indexes.

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