Emerging Assets Rebound as Yellen Makes Case for Slow Fed Moves

  • Ibovespa rises for second day as PMDB abandons Rousseff
  • Currencies head for biggest quarterly advance in four years

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Emerging-market stocks and currencies advanced as Federal Reserve Chair Janet Yellen reiterated the case for raising U.S. interest rates slowly, easing concern that a strengthening U.S. dollar will reduce demand for riskier assets.

The MSCI Emerging Markets Index added 0.2 percent to 814.83. The benchmark stock gauge rebounded after Yellen, speaking at an event in New York, said it is appropriate for U.S. policy makers to “proceed cautiously” in raising interest rates amid heightened risks in the global economy. A gauge of 20 developing-nation exchange rates jumped 0.4 percent after reversing a decline of as much as 0.3 percent. The Bloomberg Dollar Spot Index fell 0.8 percent.

A rally in emerging-market assets had been losing momentum as investors weighed prospects for higher U.S. borrowing costs. Conflicting views from Fed officials and mixed economic data in the last week threatened to erode the improving sentiment that helped drive the longest stretch of investment into exchange-traded funds that buy developing-nation stocks and bonds since May. The MSCI equity benchmark entered a bull market this month after it rose 20 percent from its low in January.

“Yellen’s comment seems to have weakened the dollar, and the dollar and EM stocks have moved in opposite directions lately,” said Jeffrey Kleintop, the chief global investment strategist at Charles Schwab & Co, who helps oversee $2.5 trillion. “We’ve come a long way in the past two months, and I think emerging-market stocks are probably due for a pause in the bull-market rally.”

The Fed this month cut the forecast for the number of interest-rate increases in 2016 to two from four. U.S. jobs data may provide greater insight on Friday as to the timing of the next move, and a Chinese manufacturing report the same day may give a clearer picture on the health of the world’s second-biggest economy.

The emerging-market equity benchmark has advanced 2.6 percent in the first three months of this year, set for the biggest quarterly rally since the period that ended in June 2014. The gauge trades at 11.6 times the projected 12-month earnings of its member stocks. That compares with a multiple of 15.8 for the MSCI World Index, which has slipped 1.6 percent in the first quarter.

ETF Flows

Investments into U.S. exchange-traded funds that buy emerging market stocks and bonds rose $1.45 billion last week, capping the longest streak of gains since May, data compiled by Bloomberg show.

The Ibovespa rose for a second day Tuesday, increasing 0.6 percent. Brazilian stocks advanced as speculation mounted that President Dilma Rousseff will be forced out of office and a new administration will be better able to cope with the nation’s worst recession in more than 100 years. The nation’s biggest political party has abandoned Rousseff just weeks before she faces an impeachment vote in Congress.

Chinese equities declined for a second day, paring this month’s advance, as technology companies slumped and property developers extended losses amid concern new price-cooling measures will hit sales. The Shanghai Composite Index lost 1.3 percent.

South Africa’s rand led gains in developing-nation currencies on Tuesday, strengthening 1.9 percent against the dollar. Russia’s ruble rose 0.6 percent, reversing a decline after Yellen’s speech to the Economic Club of New York. The gauge of 20 exchange rates advanced for a third day and was on pace for a 3.6 percent quarterly advance, the most in four years.

The premium investors demand to own emerging-market debt over Treasuries increased e10 basis points to 418, according to JPMorgan Chase & Co. indexes.

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