Emerging Currencies Decline Amid Signs of Rising Political Risk

Updated on
  • Brazil's real tumbles after banker arrested in bribery probe
  • Ruble weakens as Russia criticizes Turkey over downed plane

Brazil’s real led emerging-market currencies lower amid political turbulence fueled by the arrest of one of Latin America’s top bankers in a corruption probe and a stand-off between Russia and Turkey over a downed fighter jet. Stocks fell for a third day.

The real tumbled 1.2 percent as a bribery scandal that has engulfed the state-run oil giant led to the arrest of Grupo BTG Pactual’s chief executive officer. The Ibovespa equity gauge slumped the most since Oct. 13. Russia’s ruble declined for the third time in four days and the lira dropped to a one-week low as Russia ratcheted up criticism of Turkey for shooting down its warplane on Tuesday. Chinese shares rallied amid speculation state intervention is working.

Russia said it will review its ties with Turkey even as U.S. President Barack Obama called for an easing of tensions over the warplane incident that dented investor optimism for increased cooperation between Russia and the West in Syria after the Paris attacks. The effect of Tuesday’s events may be short-lived and investors may reduce their bearish positions on emerging-market stocks and currencies before the year end, Nathan Griffiths of NN Investments Partners said.

“Emerging markets are quite resilient, given the events of yesterday,” said Griffiths, a senior emerging-market equities manager who helps oversee $1.2 billion at NN Investment in The Hague. “This is as much about already bearish positioning than anything else. The market is short emerging-market foreign exchange and some of those positions want to unwind before the year end.”

A gauge of 20 emerging-market currencies slipped 0.2 percent, trading within 0.9 percent of a record low. The measure is heading for its eighth monthly loss this year as China’s economy slows down and concern grows higher U.S. interest rates will drain capital from riskier assets.

The MSCI Emerging Markets Index of stocks slid 0.4 percent to 836.15, falling for a third day. The equities benchmark has declined 13 percent this year and is valued at 11.2 times the projected earnings of its members. That’s 30 percent cheaper than the valuation for advanced-nation equities, which have slipped 0.7 percent in 2015.

The real dropped to 3.7456 per dollar in Sao Paulo. Andre Esteves, BTG Pactual’s billionaire CEO, was arrested as part of an investigation into an alleged bribery scheme between a cartel of builders and oil producer Petroleo Brasileiro SA. More than 100 people have been arrested so far. The probe has helped push Brazil into recession and left President Dilma Rousseff fighting for her survival amid calls for her impeachment. The Ibovespa tumbled 2.9 percent.

Ruble, Lira

The ruble weakened 0.1 percent versus the dollar and the lira slid 0.4 percent in its third straight decline. Russia “will have to respond to” any future air incidents involving Turkey, President Vladimir Putin said even while ruling out any military retaliation. Turkish companies may lose their position in the Russian market and joint projects between the two countries may be halted, Prime Minister Dmitry Medvedev said.

The dollar-denominated RTS Index of Russian stocks rebounded from a 3.3 percent drop on Tuesday, rising 1.3 percent after Obama said he will make it his top priority to prevent an escalation of tensions between Russia and Turkey.

CNOOC Ltd. posted the biggest gain in three weeks in Hong Kong, and SK Hynix Inc. jumped the most since Aug. 27 as technology shares led gains in the emerging-market index. The Shanghai Composite Index rose to a two-week high as volatility slumped amid growing investor confidence that state intervention has stabilized equities.

The premium investors demand to own developing-nation debt rather than U.S. Treasuries widened two basis points to 383, according to JPMorgan Chase & Co. indexes.