Emerging Stocks Decline as Fed Interest-Rate Move Odds Increase

  • Developing currency index tumbles, erasing an earlier advance
  • The Fed is preparing ground for rate increase, analyst says

Emerging-market stocks fell to a one-week low and currencies weakened after the Federal Reserve said the U.S. economy continues to expand at a “moderate” pace, bolstering speculation that policy makers may increase benchmark borrowing costs this year.

The MSCI Emerging Markets Index declined to 0.3 percent to 860.30 and a gauge of 20 currencies reversed a gain to fall 0.1 percent in New York after the U.S. central bank made its statement following its decision to keep U.S. borrowing costs unchanged. The odds of a December increase increased to 48 percent, from 35 percent on Tuesday, Fed futures trading indicates. Demand for developing-nation stocks, bonds and currencies has been buoyed by the Fed’s near-zero interest rates as investors seek higher returns among riskier assets.

“The Fed is clearly starting to prepare the ground more convincingly for a rate hike, and this is perceived to be negative in emerging markets,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said by phone. “Between the persistent plunge in commodity market, weakness in China, the recent rebound in emerging-market equities is under threat, and this Fed statement is adding pessimism to the sentiment.”

The MSCI developing-nation stock gauge has gained 11 percent from this year’s low in August amid speculation the Fed will continue to refrain from increasing interest rates as global economic growth falters. Currencies have bounced back 2.3 percent from record lows in September.

Brazil, China

The Ibovespa slumped 0.6 percent in Sao Paulo as raw-material producers including Vale SA dropped. Chinese shares traded in Hong Kong posted their biggest drop in a month as companies from Tsingtao Brewery Co. to Jiangxi Copper Co. reported declining earnings, and UBS Group AG cut its forecast for growth in the world’s second-largest economy.

Benchmark indexes in Dubai and Abu Dhabi slid to two-month lows. The main drag on the Abu Dhabi index was First Gulf Bank PJSC, which dropped to this year’s low after posting lower third-quarter profit.

The emerging-market currencies measure fell as the real, lira and rand reversed earlier gains following the Fed’s announcement. Russia’s ruble gained 1.6 percent as oil, the country’s biggest export, climbed in London. The premium investors demand to own emerging-market debt over U.S. Treasuries narrowed nine basis points to 389 basis points, according to JPMorgan Chase & Co. indexes.

Fed Statement

In its statement, the Fed removed a line that had said global economic and financial developments “may restrain economic activity somewhat,” saying Wednesday only that policy makers are monitoring the international situation. The “more hawkish” tone spurs high-yielding emerging-market currencies such as the real, lira and rand to “lose massively” as the dollar strengthens, Bernd Berg, director of emerging market strategy at Societe Generale in London, said by e-mail Wednesday.

The Ibovespa retreated as Vale, the world’s largest iron-ore producer, dropped 3 percent to the lowest level this month. The Hang Seng China Enterprises gauge lost 1.5 percent. Tsingtao tumbled 4.6 percent after saying third-quarter profit declined 29 percent from a year earlier. Jiangxi Copper, China’s biggest producer of the metal, lost 1.7 percent after net income slid 71 percent in the third quarter. The Shanghai Composite Index decreased 1.7 percent.

The MSCI developing-nations gauge has retreated 10 percent this year and is valued at 11.3 times the projected earnings of its members. That’s equal to the average valuation of the past 10 years and 29 percent cheaper than advanced-nation equities. Seven of 10 industry groups fell on Wednesday, with industrial and financial stocks dropping the most.

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