- Volatile trading on Friday caps week of policy uncertainy
- Yellen’s remarks leave possibility of hike next month: Fischer
Caution rippled through emerging markets on Friday as traders weighed the impact on risk assets from comments by Federal Reserve policy makers about the timing of an interest-rate increase in the U.S.
Assets from developing-nation currencies to global stocks gyrated after Fed Chair Janet Yellen spoke to central bankers and economists in Jackson Hole, Wyoming. While she didn’t discuss the specific timing of a rate move in her first public comments since June, Vice Chairman Stanley Fischer said her remarks leave open the possibility of an interest-rate hike in September. Lifting borrowing costs in the world’s largest economy could spur outflows from developing markets which have benefited from investors seeking higher yields.
The MSCI Emerging Markets Index rose 0.4 percent to 901.39 on Friday, after falling as much as 0.4 percent earlier. The equity advance trimmed a weekly decline of 1 percent, its first since the beginning of July. A benchmark of currencies added 0.3 percent to limit a five-day retreat after also erasing an earlier drop .
Stocks and foreign-exchange rates initially rallied as investors focused on Yellen’s speech and its lack of details regarding the timing of a rate move in her first public comments since June. Emerging-market assets then retreated after Fischer told CNBC that her remarks were consistent with the possibility of two hikes this year before the two indexes rebounded at the close of trading.
“A rate increase will mean stronger dollar and weaker currencies in emerging markets, which will cloud investor sentiment,” said Bruce McCain, who helps oversee $35 billion as chief investment strategist at Key Private Bank in Cleveland. “Emerging markets are pretty heavily dependent on commodity prices, and you see some uncertainty here, and you don’t really see an improvement in economic fundamentals in developing nations.”
The volatile trading on Friday echoed the uncertainty investors have faced this week ahead of the Fed’s meeting and as political risks from Brazil to South Africa increased.
A gauge of emerging-market equity price swings had the biggest weekly increase in two months. South Africa’s rand led five-day losses in currencies as President Jacob Zuma’s support failed to allay speculation Finance Minister Pravin Gordhan will be replaced. Turkish shares initially dropped on Friday after an explosion in a southeastern province raised security concerns before recouping their losses at the close. Polish stocks fell as Moody’s Investors Service said the nation’s constitutional crisis is credit negative.
A third month of rally in emerging-market assets stalled after New York Fed President William Dudley earlier this month said markets may be underestimating the odds of an imminent rate move and Dennis Lockhart of Atlanta said accelerating economic growth may warrant one or even two increases in 2016.
“Over the past two weeks, everybody has been feeling the rally may be overstretched,” said Guillaume Tresca, a senior strategist at Credit Agricole CIB in Paris.
The emerging-market stocks gauge is still up 3.2 percent in August, compared with a 0.3 percent advance for the MSCI World Index.
Expectations for a rate increase climbed after Fischer spoke, with traders pricing in a 42 percent probability of a move next month, from 32 percent after Yellen’s remarks. Odds are now nearly 63 percent the central bank will act by December, up from 42 percent two weeks ago, based on fed fund futures data compiled by Bloomberg.
The rand weakened 5.9 percent this week. Statements of support for the finance minister from Zuma and Deputy President Cyril Ramaphosa on Thursday failed to ease anxiety, with a survey of investors and other market participants by Rand Merchant Bank showing about half of them believe he will be removed.
The Borsa Istanbul 100 Index lost 1.3 percent for the week. The separatist Kurdish militant group PKK killed 11 police officers in southeast Turkey on Friday, the latest in a string of attacks against security forces that have intensified in the past year.
Polish stocks retreated for a fourth day, falling 0.3 percent. Poland’s “escalating” constitutional crisis threatens to impair investment and is credit negative, Marco Zaninelli and Michail Michailopoulos, analysts at Moody’s, wrote in a note.