Emerging-Market Assets Gain as ECB Stimulus Supports Risk Demand

  • Equities end two-day decline as tech, commodity shares rise
  • Brazil's real leads currencies to strongest levels this year

Emerging-market stocks advanced for the first time in three days and currencies rose to the strongest level this year after the European Central Bank unveiled stimulus that brought borrowing costs in the region to record lows.

The MSCI Emerging Markets Index gained 0.4 percent to 790.74. A Bloomberg gauge of 20 developing-nation exchange rates advanced 0.3 percent against the dollar, rising to the highest level this year. Brazil’s real extended its best-in-the-world rally and the Ibovespa climbed on higher speculation that a change in government may be drawing closer.

ECB President Mario Draghi exceeded investors’ expectations by cutting all of the three main interest rates and increasing monthly asset purchases to a higher-than-expected 80 billion euros ($89 billion). The move stoked demand in emerging markets, which benefit from low borrowing costs in developed nations as investors seek higher returns in riskier assets. Draghi said in a press conference after the rate announcement that policy makers “don’t anticipate” further reductions.

‘Troubled’ Outlook

While stocks and currencies rallied after the ECB’s announcement, some strategists questioned the long-term benefits of the program given China’s growth slowdown, oil trading below the budget assumptions of some governments and wide price swings in currencies. Fifty-day volatility in the MSCI equity benchmark exceeded 24 percent on Thursday, the highest level since late October.

“The outlook remains troubled because of weak growth momentum, sharp fiscal deterioration, large debt overhang and China’s financial system risk,” said Maarten-Jan Bakkum, a senior strategist at NN Investment Partners in The Hague.

Brazil’s real gained 1.7 percent against the dollar, bringing its advance to 11 percent since the start of March, the most among the world’s most-traded currencies. The Ibovespa climbed to the highest level in seven months. A news report that prosecutors requested a preventive arrest of Brazil’s former President Luiz Inacio Lula da Silva added to speculation that a change in government may be drawing closer.

Ruble, Rand

The Russian ruble and South African rand each weakened at least 0.5 percent as oil declined from a three-month high and the Bloomberg Commodity Index slipped for the second time this week

Eight of ten industry groups in the MSCI developing-nation equity benchmark rose, led by technology companies.

The EGX30 Index advanced for a sixth day to a two-month high in Cairo. The central bank removed caps on foreign-currency withdrawals and deposits for individuals and for importers of basic goods.

Chinese stocks declined as traders suspected that state funds failed to prop up shares on Thursday. That meant support was missing for the world’s worst-performing market this year amid deteriorating economic data and disappointment over stimulus measures announced during annual policy meetings this week. The Shanghai Composite Index retreated 2 percent.

The EGX30 Index advanced for a sixth day to a two-month high in Cairo. The central bank removed caps on foreign-currency withdrawals and deposits for individuals and for importers of basic goods.

Forint Weakens

All but two of 24 emerging-market currencies tracked by Bloomberg declined against the euro. Hungary’s forint fell 0.7 percent. The central bank may lower the benchmark rate this year and is ready to deploy all measures to combat “significant risks” to reaching its inflation target, Deputy Governor Marton Nagy said.

Polish government bonds rose, sending 10-year yields down to 2.91 percent. A boost in ECB stimulus is set to make Poland a magnet for investors seeking a haven from negative interest rates, Deutsche Bank AG to Rabobank International said.

Emerging-market local-currency debt returned 1.6 percent this month through Wednesday, compared with a 0.6 percent decline in euro-zone bonds, Bloomberg indexes show. The premium investors demand to own emerging-market sovereign debt over U.S. Treasuries narrowed four basis points to 419, according to JPMorgan Chase & Co. indexes.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE