Emerging Assets Drop With Commodities as Fed Rate Bets Increase

  • Brazil real drops as Rousseff impeachment speculation fades
  • MSCI developing-nation stock benchmark slips from 2016 high

Emerging-market currencies weakened for a second day and stocks fell from this year’s high as slumping commodity prices weighed on assets of exporters and increasing wagers that the Federal Reserve will raise U.S. interest rates as soon as the next quarter damped demand for risk.

Brazil’s real led declines among 24 peers, weakening 2.9 percent on speculation President Dilma Rousseff’s government is boosting efforts to stay in power amid a corruption investigation. The rand fell 2.5 percent, as police said South Africa’s finance minister failed to meet a deadline to answer questions in a probe into the national tax agency. The ruble fell as Brent crude traded below $40 a barrel. The offshore yuan weakened after China’s central bank cut its daily reference rate by the most since January. Persian Gulf shares capped the longest stretch of losses in two months.

While the Fed is forecast to keep borrowing costs unchanged at a two-day meeting that started Tuesday, the probability is increasing that improving U.S. economic data will encourage policy makers to push forward further tightening, futures trading indicates. That’s reducing demand for emerging-market assets following a rally in the past month. Oil prices retreated on signs Iran won’t join major producers in freezing output. The Bloomberg Commodity Index fell 0.8 percent, dropping for a second day.

Currencies Weaken

“Declining oil prices and some nervousness about the upcoming Fed meetings explain why emerging markets are a bit weaker,” said Maarten-Jan Bakkum, a senior strategist at NN Investment Partners in The Hague, whose favored equity markets include India, Mexico and Argentina. “We should also not forget that markets had been really strong in the preceding weeks.”

A gauge tracking 20 emerging-market currencies fell 0.8 percent. The MSCI Emerging Markets Index retreated 1.6 percent to 790.68 as all 10 industry groups declined. Bonds across the developing world fell, widening the premium investors demand to own the notes over U.S. Treasuries for a second day.

A 17 percent rally in the MSCI gauge through yesterday from this year’s low in January had pushed the gauge’s 14-day relative strength index to 72.15, the highest since April and above the threshold of 70 that signals to some analysts that an asset has risen too much. That measure fell to 63.15 today.

India, China

The Bloomberg GCC 200 Index of stocks in the oil-exporting Gulf Cooperation Council slipped 0.8 percent as equities in Abu Dhabi, Saudi Arabia and Qatar decreased more than 0.8 percent. BHP Billiton Ltd. plunged 5.1 percent in Johannesburg after Macquarie Research downgraded the world’s biggest mining company’s shares.

Drugmakers paced declines on India’s benchmark S&P BSE Sensex Index, with Lupin Ltd. slumping 7.6 percent after a report the company’s Goa unit received observations from the U.S. Food and Drug Administration.

The Hang Seng China Enterprises Index of mainland stocks traded in Hong Kong retreated 0.9 percent. The Shanghai Composite Index added 0.2 percent in late trading amid speculation state-backed funds continued to intervene to support the market during annual policy meetings.

The rand weakened the most since Feb. 26 after South African police said Finance Minister Pravin Gordhan failed to meet the second deadline to answer questions about the so-called rogue unit at the country’s tax authority. On Monday, Gordhan said he hadn’t been notified of the second deadline. Egyptian stocks extended gains after the biggest currency devaluation since 2003.

Russia, Brazil

The ruble depreciated 1.5 percent. Falling oil prices overshadowed optimism that relations with Europe and the U.S. will improve after President Vladimir Putin ordered some forces to withdraw from Syria.

Brazilian assets tumbled as speculation mounted that former President Luiz Inacio Lula da Silva would be named a cabinet minister, potentially shielding him from prosecution and lowering expectations of a change in government. The former leader will decide as early as Tuesday whether to accept the the job, according to people aware of the discussions.

The Mexican peso and the ringgit weakened at least 0.7 percent. Malaysia’s currency is “very undervalued" and the nation’s assets are attractive as commodity prices are reaching a bottom, Mark Mobius, executive chairman at Templeton Emerging Markets Group, said in a speech in Kuala Lumpur Tuesday.

India’s two-year bonds rose, pushing the yield down four basis points to 7.29 percent, after inflation cooled more than estimated, boosting speculation the central bank will lower interest rates.

Russia’s 10-year yield rose for a sixth day, climbing eight basis points to 9.51 percent. The rate is still down from as high as 10.95 percent in January amid growing bets the central bank will resume interest-rate cuts.

The premium investors demand to own emerging-market sovereign debt over U.S. Treasuries widened two basis points to 415, according to JPMorgan Chase & Co. Indexes.

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