Emerging Markets Quiver as U.S. `Full Employment' Backs Fed Move

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  • Prospects for rate rise send stocks, currencies to weekly loss
  • MSCI gauge extends drop since China's yuan move to 10 percent

Emerging-market stocks and currencies declined to cap a weekly retreat as the U.S. jobless rate dropped to a level the Federal Reserve considers to be full employment, bolstering the case for an interest-rate increase.

Developing-nation assets extended losses on Friday after Labor Department data showed unemployment in the world’s largest economy fell to 5.1 percent, the lowest since April 2008. The appetite for riskier assets diminished this week after Fed Vice Chairman Stanley Fischer predicted that U.S. inflation will move higher, renewing speculation that policy makers may consider a rate increase at their meeting Sept. 16-17.

Emerging-Market Stocks, Currencies Fall in Tandem

The MSCI Emerging Markets Index slumped 1.6 percent to 788.59 on Friday in New York. The gauge dropped 3.9 percent in the five days through Sept. 4, its 15th decline in the 19 weeks since April. Stocks have tumbled 10 percent since Aug. 11, when China unexpectedly devalued the yuan, deepening a rout amid concern that the slowdown in the second-biggest economy will damp global demand. A gauge of 20 developing-nation currencies lost 1.8 percent for the week, extending a record low.

“The option for a September rate hike remains on the table and emerging-market assets will remain under pressure,” Societe Generale SA strategist Bernd Berg said from London. “The unemployment rate at 5.1 percent puts a bit of pressure on the Fed to explain why they need to wait more with such a low number. I expect the assets to sell off further ahead of the Fed meeting.”

Beige Book

Expectations for a September rate increase, which had eased amid a global rout triggered by China’s move, jumped after the jobs report. Investors now see a 34 percent probability the Fed will raise rates this month and a 46 percent chance of a move by October, according to trading in federal-funds futures. The chances for action in December were 62 percent.

Friday’s data also showed American companies hired 173,000 workers in August, below economists’ estimates for an addition of 217,000. On Wednesday, an anecdotal survey called the Beige Book showed the U.S. economy expanded across most regions and industries in July and August.

Even as China’s mainland market remained closed Friday for a holiday after a military parade, the country’s stocks listed in Hong Kong dropped to a two-year low. The Hang Seng China Enterprises Index slid 1.4 percent as investors speculated Shanghai-listed equities will fall when they resume trading Monday. The Hong Kong gauge has tumbled 23 percent this year, the worst-performing index in the world after Peru, as the boom in mainland equities turned to bust.

India’s S&P BSE Sensex fell 2.2 percent, for a fourth week of declines and the lowest close since July 2014. Overseas investors sold a net $231 million of the nation’s stocks on Sept. 2, paring this year’s inflow to $4.1 billion.

Brazil’s real weakened 2.7 percent against the dollar, extending this week’s decline to 6.8 percent. The currency has slumped amid deepening concern that the country, beset by what officials project will be its worst recession in a quarter-century, will lose its investment-grade rating. The Ibovespa stock benchmark fell 1.8 percent, pushing its five-day decline to 1.4 percent.

Turkish Tensions

In Turkey, the Borsa Istanbul 100 Index ended a two-day rally and posted a 2.3 percent weekly retreat. The lira fell for a seventh week, its longest streak of losses since 2004. Even if Fed officials wait until December before raising rates, the lira may remain weak given local political tensions before a repeat general election in November, Rabobank strategist Piotr Matys said.

South Africa’s benchmark stock index fell 2.6 percent, erasing a weekly gain. The rand weakened 2.1 percent versus the dollar.

Russia’s ruble lost 1.8 percent. The country is considering what could be the first sale of yuan bonds by a foreign government in mainland China. The Micex Index declined 0.9 percent.

The MSCI emerging-market gauge trades at 10.4 times the projected earnings of its constituents, a 30 percent discount to advanced-nation stocks. The premium investors demand to own developing-nation debt over U.S. Treasuries widened two basis points to 397 basis points, according to JPMorgan Chase & Co. indexes.