Emerging Stocks, Currencies Drop as Traders Weigh Fed Timing

Higgins: EM Stocks in Dollars the Place to Go for Income
  • South African rand, South Korean won lead currencies lower
  • Ruble, Russian bonds decline amid standoff with Ukraine

Emerging-market stocks fell for the third time this week and currencies weakened as caution prevailed among investors struggling to discern the timeline for an increase in U.S. interest rates.

Consumer companies led losses as all 10 industry groups in the MSCI benchmark fell. The South African rand and South Korean were the worst-performing currencies, each weakening at least 0.9 percent. Turkish bonds and the lira slid before a review by Fitch Ratings. The ruble retreated and Russian bond yields rose amid a growing standoff with the government in Kiev.

A rally in emerging markets that has sent stock valuations to a 15-month high is stuttering amid heightened political risks in emerging Europe and the possibility of an interest-rate increase by the Federal Reserve this year. Hawkish comments this week from regional Fed chiefs and a dovish tone from minutes of the last policy meeting set the stage for Fed Chair Janet Yellen’s speech next week in Jackson Hole, Wyoming. Speaking to reporters late Thursday, San Francisco Fed President John Williams said the central bank’s September meeting is “in play” for a rate move.

“Emerging markets are running out of steam after the gains we’ve seen in recent weeks,” said Anders Svendsen, an analyst at Nordea Bank A/S in Copenhagen, who sees value in the ruble after its underperfomance against oil. “We are seeing people taking some profits.”

The MSCI Emerging Markets Index fell 0.7 percent to 910.34, leaving it little changed for the week. A gauge of developing-nation exchange rates fell 0.5 percent, pushing its five-day decline to 0.4 percent.

Russia Standoff

The ruble weakened 0.4 percent as Ukraine warned of a possible invasion by Russia, reigniting concern that geopolitical tensions will worsen. While the currency gained 1.3 percent this week, it lagged a rally in oil, its main export, that pushed Brent crude past $50 a barrel.

The cost of insuring Russian debt against default for five years climbed on Friday, extending an increase since President Vladimir Putin last week accused the government in Kiev of engaging in “terror” tactics in Crimea. Yields on ruble bonds due in February 2027 rose two basis points on Friday to 8.32 percent.

The Ukrainian hryvnia fell 0.2 percent to the weakest closing level against the dollar in three months. President Petro Poroshenko warned on Thursday of a possible invasion by Russia.

Stocks

The emerging-market equity gauge is up 15 percent this year and trades at 11.5 times its 12-month projected earnings, near the highest level since May 2015. The measure’s 14-day relative strength index fell below 70, a level some technical analysts say indicates the securities are overbought, for the first time in two weeks.

The Hang Seng China Enterprises Index of mainland companies traded in Hong Kong declined 0.5 percent, trimming a third week of advances. Equity gauges in Poland dropped 0.9 percent.

“Investors are taking cautious steps by cashing in some gains as Yellen might make some announcements at the Jackson Hole meeting,” said Jonathan Ravelas, chief market strategist at Manila-based BDO Unibank Inc. “We have seen a good run for sometime and the market is ripe for profit-taking.”

Currencies, Bonds

Turkey’s lira retreated for a second day, falling 0.1 percent. Yields on five-year government bonds climbed four basis points to 9.54 percent, the highest level in almost two weeks. After the close of trading, Fitch affirmed the country’s investment-grade credit ranking and lowered the outlook to negative, as a failed coup attempt last month increased the political risks in the country.

The rand slid 1 percent, leaving it down 0.3 percent this week. The won dropped 0.9 percent to the weakest level in more than two weeks. Brazil’s real rallied 1.1 percent as the central bank scaled back efforts to weaken the currency.

The yield on China’s 10-year debt rose two basis points to 2.72 percent. Yields on similar-maturity South African debt climbed seven basis points to 8.47 percent, the biggest increase on a closing basis since July 18.

The premium investors demand to own emerging-market bonds rather than U.S. Treasuries narrowed five basis points to 330, according to JPMorgan Chase & Co. indexes.

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