Emerging Assets Drop as Fed Official Signals Possible June Move

Updated on
  • Lira plunges as Turkey's AK party said to plan convention
  • Stocks decline for fourth day in worst streak since December

Citigroup's Lee: Emerging Market Growth Model Is Busted

Emerging-market currencies fell for a third day amid a resurgent dollar and stocks dropped to a four-week low after Federal Reserve officials indicated a June interest-rate increase is still possible.

A U.S. rate move next month is “a real option,” Fed Bank of Atlanta President Dennis Lockhart said, against a backdrop of tepid global growth that has sparked a renewed selloff in equities. The futures market shows only 10 percent chance for a move higher in U.S. rates next month, with Friday’s jobs report a key indicator to determine the odds.

The Turkish lira plunged as the country’s prime minister was said to plan to step down this month, as a government power struggle threatened to drag the country back into the kind of political turmoil that spurred an investor exodus last year. Russia’s ruble weakened as trading resumed after a holiday and Brent crude sold for less than $45 a barrel. The MSCI Emerging Markets Index dropped for a fourth day, the worst losing streak this year, as all 10 of the stock benchmark’s industry groups retreated.

“Emerging markets are reacting to the stronger dollar, which may be related to Lockhart’s comments yesterday,” said Michael Wang, a strategist at hedge fund Amiya Capital LLP in London, who favors Indian, Mexican and South Korean stocks. “While the probability of a hike next month is very low, I do think the market is underpricing the chances of a hike after that, and to that extent emerging markets may be vulnerable.”

Lira Plunges

The MSCI Emerging Markets Currency Index fell 0.9 percent to the lowest level since April 7.

Turkey’s lira plunged 3.8 percent. The currency extended declines after a person familiar with the matter, who asked not to be identified citing the sensitivity of the subject, said the ruling Justice & Development Party, or AK Party, will hold a leadership contest within about 15 days without Prime Minister Ahmet Davutoglu as a candidate.

The ruble weakened 2.9 percent against the dollar. Hedge funds and other large speculators have trimmed net wagers on the country’s currency by 47 percent since they reached a one-year high in March, according to the Commodity Futures Trading Commission in Washington.

Stocks Slump

The ringgit retreated 1.5 percent to the weakest closing level against the dollar since March 29. The won declined 1.2 percent and the Thai baht fell 0.8 percent.

The Bloomberg Dollar Spot Index climbed 0.5 percent after rising 0.7 percent on Tuesday. The Fed’s San Francisco President John Williams said he would support raising rates at the next meeting, provided the economy stayed on track.

The MSCI Emerging Markets Index fell 0.9 percent to 813.52. Raw-material stocks led the decline, slumping 2.7 percent.

Gulf stocks fell for a fifth day. The Bloomberg GCC 200 Index dropped 0.4 percent, with the Qatar benchmark sliding 0.9 percent and Saudi Arabian stocks falling 0.8 percent. Egypt’s EGX30 Index declined 1.2 percent in a fourth day of losses, the longest streak since January. 

Russia, China

Russia’s Micex Index slipped 1.4 percent, the most since February. The Ibovespa rose 0.6 percent in Sao Paulo after swinging between a 0.8 percent gain and a 0.6 percent decline.

The Hang Seng China Enterprises Index of mainland stocks listed in Hong Kong dropped 0.6 percent in its first three-day decline in a month. The Shanghai Composite Index trimmed its decline and was down 0.1 percent.

The premium investors demand to own emerging-market debt over U.S. Treasuries widened four basis points to 400, according to JPMorgan Chase & Co. indexes. It rose 11 basis points on Tuesday, the most since Feb. 8.

A “rapid surge” in the debt of state-owned companies “poses new potential risks to emerging-market sovereign ratings,” S&P Global Ratings said in a report. “Emerging markets accounted for 47 percent of growth in global debt in 2007-2014, a leap from 22 percent in 2000-2007,” the report said.