Emerging Stocks Drop With Oil; Currencies Slump Against Dollar

  • Price swings in benchmark equity gauge at this year's widest
  • Most Asian markets closed for lunar New Year holidays

Emerging-market stocks ended a two-day gain amid the widest price swings this year as slumping oil prices sapped energy companies and traders weighed the timing of U.S. interest-rate increases.

The MSCI Emerging Markets Index slid 0.7 percent to 734.13. All 10 industry groups retreated. Russian oil producer Lukoil PJSC led a 1.4 percent drop in a gauge of energy shares as Brent crude tumbled for a third day. Shares in India fell the most in two weeks. A gauge of 20 developing-nation exchange rates against the dollar declined 0.3 percent. Most Asian markets were closed for lunar New Year holidays.

Emerging-market equities have declined 7.6 percent this year as sliding oil prices, global growth concern and the prospects for higher U.S. interest rates damped demand for riskier assets. Thirty-day historical volatility in the benchmark index increased to 26 percent, the highest level since October. Futures traders reduced the odds of a Federal Reserve interest rate increase in 2016 to 35 percent on Monday from more than 50 percent last week.

“Equity-market volatility shows us that we shouldn’t be too relaxed here, given no one really knows where oil prices are heading,” said Simon Quijano-Evans, chief emerging-markets strategist at Commerzbank AG in London, who favors central and eastern European, Turkish and Indonesian foreign-currency bonds.

Fund Flows

A measure of expected price swings for the iShares MSCI emerging markets exchange-traded fund has increased 54 percent in 2016. The Bloomberg developing-nation currency gauge is down 1.3 percent after touching a record low on Jan. 20.

Sentiment toward developing nations will remain “cautious” until Federal Reserve Chair Janet Yellen gives testimony to Congress on Wednesday, said Guillaume Tresca, a strategist at Credit Agricole SA in Paris.

Investors pulled more than $1 billion out of U.S. exchange-traded funds that invest in emerging markets last week, leaving the ETFs in the longest losing streak since September.

“The rate market is basically pricing out any rate hikes this year, said Aurelija Augulyte, a strategist at Nordea Markets in Copenhagen, who broadly prefers the Mexican peso after recent losses. If Yellen “indicates there could be room for the Fed to hike, this could be positive for the dollar, negative for risk, and negative for emerging markets.”

Valuation Discount

Companies on the MSCI Emerging Markets Index trade with an average valuation of 10.8 times projected 12-month earnings after a 7.6 percent decline this year. That compares with a multiple of 14.5 for the MSCI World Index of advanced-nation shares, which has retreated 9.9 percent this year.

The dollar-denominated RTS Index slumped 3 percent in Moscow. The S&P BSE Sensex Index fell 1.3 percent in Mumbai. Brazilian markets were closed for a holiday.

Russia’s ruble led currencies lower, weakening 1.4 percent against the dollar. The lira fell 1 percent as concerns about higher U.S. borrowing costs and Turkey’s potential involvement in the civil war in Syria hurt sentiment. Turkey relies on foreign capital to finance the widest current-account deficit among the Group of 20 nations.

The premium investors demand to own emerging-market debt over U.S. Treasuries widened 13 basis points to 486, according to JPMorgan Chase & Co. indexes.

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