Emerging Stocks Drop as ECB Move Fails to Allay Fed Rate Concern

  • Some investors disappointed with degree of accommodation
  • Real rises against dollar as Brazil signals rate increase

Emerging-market stocks dropped and currencies weakened against the euro as some investors bet the European Central Bank’s extension of stimulus won’t be enough to offset a pending increase in U.S. interest rates that is expected to lure money away from riskier assets.

The MSCI Emerging Markets Index declined for a second day, dropping 0.3 percent to 819.25. All except one of 24 developing-nation currencies fell against the euro, led by the Mexican peso and Indonesian rupiah. Brazilian stocks rallied and the real strengthened against the dollar as the nation’s central bank signaled it may raise interest rates early next year and lawmakers began impeachment proceedings against President Dilma Rousseff.

ECB President Mario Draghi said the central bank will keep the pace of monthly bond purchases steady at 60 billion euros ($65 billion) even as it extends the program until at least March 2017. Most economists surveyed by Bloomberg had foreseen an increase in monthly purchases. Investors are evaluating the impact of diverging monetary policies as the U.S. moves closer to raising its near-zero interest rates that have supported demand for developing-nations assets. Federal Reserve Chair Janet Yellen signaled in testimony before Congress that the economy is almost ready for higher borrowing costs.

Turkey, Mexico

“Emerging markets are a risk asset, and risk assets are selling off so they’re going to get lumped in there,” Brian Rehling, co-head of global fixed income strategy at Wells Fargo Advisors LLC, said by phone. “All the moves you see in currencies across the globe are in reaction to Draghi. Emerging markets sell into Europe, and with disappointing stimulus you could extrapolate Europe won’t recover quite as fast as hoped and that could also be a drag.”

The Borsa Istanbul 100 Index dropped 1.2 percent, declining for a second day. The lira slumped 2.8 percent against the euro. Turkish assets have been pressured amid mounting tension over the country’s downing of a Russian warplane near the Syrian border.

The IPC Index slumped 1 percent in Mexico City, the worst performance in Latin America. Mexico’s peso sank 3.9 percent against the euro. Colombia’s benchmark Colcap Index dropped 0.6 percent to the lowest level since July 2009, while its currency dropped 2.4 percent.

The real strengthened 2.1 percent against the dollar. Brazil’s central bank will adopt necessary measures to ensure inflation closer to the target, policy makers said in the minutes of their Nov. 24-25 meeting.

Rousseff Impeachment

Brazilian stocks jumped 3.3 percent, the most in a month, after lower house chief Eduardo Cunha started impeachment proceedings against Rousseff, boosting speculation the political crisis that has paralyzed the country is closer to an end. South Africa’s FTSE/JSE Africa All Share Index fell for a fifth day, declining 1.4 percent to the lowest since Sept. 30.

Historical 5-day volatility in the developing-nation stock gauge, a measure of price swings, jumped to 23 percent this week, the highest level since September. A gauge of 20 emerging-market exchange rates against the dollar increased 0.7 percent on Thursday after touching a record low last week.

“The kind of volatility we’re seeing across markets right now sends people running,” said Blaze Tankersley, chief market strategist at Bay Crest Partners LLC, a brokerage firm in New York. “When you see a move like that, your first instinct is to get out of whatever position you have, regardless what asset class.”

Yield Spread

The MSCI Emerging Markets Index has fallen 14 percent this year and trades at 11.3 times the projected earnings of its members, which is almost a third cheaper than the valuation for advanced-nation stocks, which have slipped 1.8 percent in 2015.

The premium investors demand to hold emerging-market debt rather than U.S. Treasuries narrowed eight basis points to 387 according to JPMorgan Chase & Co. indexes. Franklin Templeton bond chief Michael Hasenstab warned in an interview with Bloomberg Television that bond investors aren’t prepared for higher U.S. interest rates.

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