Emerging Stocks Rise as Fed Reiterates `Gradual' Tightening Plan

  • Federal Reserve reiterates gradual pace in U.S. rate increase
  • Emerging stocks trade within 1.2% of a five-month high

Emerging-market stocks advanced as Federal Reserve policy makers reiterated that they will probably raise U.S. interest rates at a “gradual” pace, supporting demand for riskier assets that have been propped up by a weaker dollar.

The MSCI Emerging Markets Index rose 0.1 percent to 843.17, closing within 1.2 percent of a five-month high, as gains in energy and consumer staples stocks outweighed declines in technology companies. A gauge of developing-nation exchange rates was little changed near the highest level in nine months.

Stocks erased declines after the Fed released its statement following a two-day meeting at which policy makers kept benchmark borrowing costs unchanged. While restating the monetary authority’s intent to raise interest rates slowly, it also omitted previous language saying that “global economic and financial developments continue to pose risks” and said labor market conditions “have improved further.”

“The markets are relieved to see that the Fed hasn’t changed its cautious tone,” Tim Ghriskey, who helps oversee $1.5 billion as managing director and chief investment officer at Solaris Asset Management, said by phone. “The markets are ready for a hike at some point this year, but we saw that this is the Fed that is still going to be slow and cautious in raising rates, and this is a good signal for emerging markets.”

The Fed announcement reignited this year’s rebound as traders bet continued weakness in the dollar will support demand for riskier assets. A rally in developing-nation securities gained momentum after the Fed’s meeting in March, when policy makers signaled that they would make two-interest rate increases this year, down from four forecast in December.

Wednesday’s advance pushed the emerging-market equity benchmark’s advance from this year’s low in January to 22 percent. The gauge trades at 11.8 times projected 12-month earnings, a 26 percent discount to developed-nation stocks in the MSCI World Index.

Developing-nation stocks are headed for a second successive month of gains. Traders poured $9.6 billion into emerging-market exchange-traded funds, the largest monthly inflow in more than three years, according to a report from Markit Ltd.

Investors have been moving back into developing nations on bets that the Fed’s dovish position will bolster returns from riskier assets. Policy makers have held benchmark borrowing costs steady after increasing them from close to zero in December, the first move in nine years.

Dubai, Malaysia

Seven out of 10 industry groups in the MSCI Emerging Markets Index gained Wednesday, led by consumer staples stocks. Petroleo Brasileiro SA rallied 6 percent, helping drive a 2.6 percent advance in the Ibovespa in Sao Paulo. PetroChina Co. Ltd rose 3.4 percent in Hong Kong, while Russian oil producer Novatek OJSC rallied to a five-month high in London trading.

The Dubai Financial Market General Index fell 1.6 percent to a two-week low. Home prices in the emirate may decline by 10 percent this year because of lower oil prices and a strong dollar-pegged local currency, which makes them more expensive for international investors, according to S&P. The prices slumped about 13 percent on average in 2015.

The ringgit rose 0.3 percent after Malaysia named Muhammad Ibrahim as successor to central bank Governor Zeti Akhtar Aziz, who will step down at the of the month. The currency had slumped 1.5 percent in the previous four days after state-owned investment company 1Malaysia Development Bhd. said it defaulted on a bond payment. The ruble gained 0.1 percent to 65.12 against the dollar. The Colombian peso added 0.7 percent in the second day of gains.

The premium investors demand to own emerging-market sovereign debt rather than Treasuries widened seven basis points to 391 basis points, according to JPMorgan Chase & Co. indexes.

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