Emerging Currencies, Stocks Drop as Investors Weigh Fed Outlook

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Emerging-market currencies declined to a two-month low and stocks retreated as investors weighed the timing of an increase in the near-zero U.S. interest rates that have buoyed demand for riskier assets.

The ruble weakened to the lowest level against the dollar since April 21 as oil ended a two-day gain and the Bank of Russia suspended some foreign-exchange auctions. A gauge tracking 20 currencies slipped 0.5 percent. The MSCI Emerging Markets Index retreated 0.3 percent to 1,001.69 as six out of ten industry groups fell. Stocks in Shanghai jumped after a Chinese factory gauge rose for the third month in May.

Developing-country currencies and stocks have retreated in all but one of the last 11 days as U.S. economic data supported the case for the Federal Reserve to raise interest rates this year. Data Monday showed increased construction spending and expanded manufacturing, overshadowing a report that showed consumer purchases stalled in April.

“This week will be make-or-break for rate hikes this side of September,” Neil Shearing, the chief emerging-markets economist at Capital Economics, said by phone from London. “Investors are starting to price back in rate hikes this year due to a slightly more positive tone in the data.”

The developing-nation stock gauge has gained 4.9 percent this year and its member stocks sell for an average 12 times projected 12-month earnings. The MSCI World Index has risen 4 percent in 2015 and trades at a multiple of 16.7.

Weaker Currencies

Investors added $3.3 billion to U.S. exchange-traded funds that invest in emerging-market stocks and bonds in May, 39 percent less than the previous month, as flows to South Korea diminished and money moved out of Mexico.

The ruble weakened 2.4 percent to 53.59 per dollar as the central bank’s suspension of the sale of one-year foreign-currency repurchase agreements was the latest measure helping to stem the currency’s rally this year to 14 percent. The stronger exchange rate curtailed Russia’s local-currency earnings from exports in a year when it’s locked in a recession and facing a fiscal deficit.

Turkey’s lira dropped for the eighth day, depreciating 0.7 percent against the dollar before parliamentary elections on Sunday. Banks including Citigroup Inc. said last week the prospect of a coalition government is reviving one of the biggest bear-market trades this year.

Poland’s zloty weakened 0.1 percent against the euro. The nation’s Purchasing Managers’ Index fell to a seven-month low of 52.4 in May, missing the 53.5 median estimate in a Bloomberg survey. Numbers above 50 signal expansion.

Brazil’s real rose 0.4 percent against the dollar after falling as much as 1.1 percent.

China PMI

China’s official Purchasing Managers’ Index climbed to 50.2 in May, compared with 50.1 in April, suggesting monetary easing and relaxation of fiscal rules have helped cushion the economy. A separate preliminary gauge from HSBC Holdings Plc and Markit Economics rose to 49.2 from 48.9. The Shanghai Composite Index rallied 4.7 percent, the most since Jan. 21.

Chinese policy makers may set an additional quota of 500 billion yuan ($80.7 billion) to 1 trillion yuan for local governments to swap debt into municipal bonds, according to people familiar with the discussions.

“With economies globally still facing slow growth, some investors prefer to move into Chinese stocks temporarily, where there is a likelihood of recovery or more stimulus from the government,” Dwianto Oktory, a fund manager at PT MNC Asset Management, said by phone from Jakarta on Monday.

Huaneng Power International Inc. jumped 3.9 percent in Hong Kong to pace an increase for utility shares on expectations the government will boost mergers among power companies. Samsung Electronics Co. fell to the lowest since Dec. 18 in Seoul after South Korean exports declined the most in almost six years.