Emerging Markets Retreat as Political Unrest Adds to Fed Anxiety

Are Emerging Markets Ready for the Fed to Hike Rates?
  • South African bonds fall most since December as FinMin probed
  • Istanbul stocks retreat as Turkey starts Syria airstrikes

Emerging-market stocks declined the most in seven weeks and currencies weakened as political and security concerns resurfaced in South Africa and Turkey, sapping appetite for riskier assets before a much-anticipated address by Federal Reserve Chair Janet Yellen.

The rand weakened and South African bonds slid the most this year after a news website said Finance Minister Pravin Gordhan had been summoned to report to police, raising concern he may be replaced. Turkish stocks dropped the most in three weeks as the country launched its biggest military operation yet in Syria. South Korea’s won fell after North Korea launched a ballistic missile from a submarine. Brazilian stocks slid as traders weighed the passage of a budget bill that was seen as a partial victory for the government against a drop in commodity prices that damped the outlook for raw-material exports.

The flare-ups exposed the fragility of the emerging-market rally spurred in large part by investors seeking refuge from low or negative rates in advanced countries. Compounding the risks are growing wagers that the Fed will resume interest-rate increases this year that would diminish the allure of higher-yielding assets. Traders are waiting to see if Yellen touches on how aggressive U.S. monetary tightening will be when she addresses a gathering of central bankers on Friday.

“The big moves happening in Turkey and South Africa are a reminder that political risk is quite big in emerging markets,” said William Jackson, a London-based economist at Capital Economics Ltd. “While political risks do matter, now it is all eyes on the Fed and Yellen. The rally seems to have lost a bit of steam as investors wait to see what Yellen will say. But it doesn’t look like there has been a dumping of the assets.”

Stocks

The MSCI Emerging Markets Index fell 1.1 percent to 896.75. All 10 industry groups declined, led by financial and raw-material stocks.

The Borsa Istanbul 100 Index dropped as much as 2.9 percent. The biggest retreat since the wake of a failed coup in July came as airstrikes against jihadist positions around the Syrian town of Jarablus, reported by the prime minister’s office, were backed by Turkish special forces soldiers on the ground, according to CNN-Turk.

A gauge of South African banking stocks slumped 5.1 percent, the most this year. Gordhan received “correspondence” from the Hawks police unit and is getting legal advice, Treasury spokesman Phumza Macanda said after the Daily Maverick reported on Wednesday the finance minister and four former tax officials had been asked to report to their office on Thursday.

Brazil, China

Dubai’s DFM General Index retreated for a fourth day and the Micex Index ended a two-day advance in Moscow, dropping 0.3 percent. Brent crude fell 1.8 percent, closing at less than $50 a barrel for a third day.

The Ibovespa slid 0.5 percent. Petroleo Brasileiro SA, the Brazilian state-controlled oil company, contributed the most to the benchmark index’s decline, falling 2.1 percent.

The Hang Seng China Enterprises Index of mainland stocks listed in Hong Kong fell 0.8 percent, as Industrial and Commercial Bank of China decreased 2 percent and China Construction Bank Corp. dropped 0.9 percent.

Currencies, Bonds

The MSCI Emerging Markets Currency Index fell 0.7 percent. The won weakened 0.6 percent against the dollar. North Korea test-fired the missile early Wednesday, adding geopolitical tension in the region since South Korea said it would deploy a new Thaad missile shield system.

The rand dropped 1.2 percent to 14.1674 per dollar after a 3 percent decline on Tuesday. The currency has fallen for four days straight, diminishing the appeal of the best carry trade in emerging markets this quarter.

Yields on South African local-currency debt due Dec. 2026 increased 53 basis points to 9.05 percent, the biggest move since President Jacob Zuma roiled markets in December by firing then-Finance Minister Nhlanhla Nene and replacing him with a little-known lawmaker.

In Turkey, the government’s 10-year bond yield increased two basis points to 9.81 percent. The premium investors demand to own emerging-market debt over U.S. Treasuries was unchanged at 335 basis points, according to JPMorgan Chase & Co. indexes.

Global bond funds have become more exposed to fluctuations in emerging debt markets amid a hunt for yield in recent months. They now have more money invested in developing-nation bonds than at any time in the past four years. The average allocation jumped to 16.5 percent in July, up almost four percentage points since the beginning of the year, according to a Morningstar Inc. data set of 96 U.S.-domiciled global funds.

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