Emerging-Market Rally Stalls as ECB Keeps Stimulus Plans on Hold

Markets Await Hints of ECB Stimulus
  • Markets had ‘way too high hopes’ for central bank aid: Nordea
  • Turkish stocks at five-month low after state of emergency

Emerging-market stocks and currencies paused a rally that’s taken them to the highest level in 11 months as European Central Bank President Mario Draghi dented hopes of an acceleration in stimulus. Turkish shares and bonds extended losses.

The MSCI Emerging Markets Index was little changed after a 4.4 percent advance this month. The Borsa Istanbul 100 Index headed for its worst week since 2008 and Turkey’s 10-year yields climbed to their highest since May after S&P Global Ratings downgraded the country’s credit grade and the president imposed a state of emergency. Indonesian stocks fell after the country’s central bank unexpectedly held interest rates unchanged. The South African rand rose 0.8 percent after policy makers in Pretoria left borrowing costs steady, in line with forecasts.

Draghi said policy makers will only add fresh stimulus this year once they have a clearer picture of the economic impact from the U.K.’s vote to leave the European Union. That disappointed some investors who had been looking for a more forceful signal from the bank and cooled prospects for a rally that Goldman Sachs Group Inc. says has attracted more than $18 billion into developing-nation assets in the past month.

“I fear that the markets have way too high hopes for how much easing the central banks can do this summer,” said Anders Svendsen, an analyst at Nordea Bank A/S in Copenhagen. “The market had a tiny bit of hope that the ECB would do something.”

The MSCI Emerging Markets Index ended the session at 871.17. Five of the 10 industry subgroups dropped, led by consumer stocks. A gauge of developing-nation currencies rose less than 0.1 percent.

Stocks

The Borsa Istanbul 100 Index fell 4.4 percent, pushing its decline this week to 14 percent and sending valuations to a seven-year low. A gauge of the nations’ bank shares wiped out this year’s gains.

President Recep Tayyip Erdogan declared a state of emergency as the government pursues those suspected of being behind an attempted coup. S&P Global Ratings cut Turkey’s credit on Wednesday to BB, two steps below investment grade, with a negative outlook, to reflect the further fragmentation of the political landscape.

For more, see: Turkey’s Power Struggles Stem From Erdogan’s Grip: QuickTake

Russia’s Micex Index advanced for the first time in five days, climbing 0.7 percent. South African stocks added 0.3 percent. The Ibovespa added 0.1 percent in Sao Paulo, led by Brazilian commodity stocks including Vale SA, which rallied 5.4 percent.

The Jakarta Composite Index declined 0.5 percent after the central bank held its benchmark rate at 6.5 percent. Sixteen of 26 analysts surveyed by Bloomberg had predicted a cut to 6.25 percent.

South Africa’s rand advanced 0.8 percent as the central bank left borrowing costs unchanged as it forecasts the economy will grow at zero percent this year. The Turkish lira climbed 0.6 percent after sliding 3.7 percent in the past two days.

Malaysia’s ringgit fell for a fourth day following a report that U.S. prosecutors are seeking to seize more than $1 billion of assets allegedly misappropriated from 1Malaysia Development Bhd. Brazil’s real weakened 0.4 percent.

Russia’s ruble slid 1 percent in its third say of losses after a Kremlin adviser echoed President Vladimir Putin’s warning this week that the Russian currency may have appreciated too far.

Bonds

Turkey’s 10-year local currency government bonds dropped, with the yield climbing 18 basis points to 10.25 percent. The rate on similar-maturity Russian bonds decreased three basis point to 8.52 percent.

The spread on emerging-market bonds over U.S. Treasuries widened three basis points to 356, according to JPMorgan Chase & Co. indexes.

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