Emerging Stocks Resume Drop; Brazil Real Leads Currencies Lower

Updated on
  • Bloomberg Commodity Index little changed after two-day rally
  • Goldman says recent rally made currencies ‘less undervalued’

Brazil Expecting Rate Cuts in Second Half: Santos

Emerging-market stocks declined for the first time in three days as a rebound in commodity prices petered out and investors weighed the potential impact of a change of government in Brazil after its president was suspended from office.

The real halted a two-day rally as the Brazilian central bank’s efforts to weaken the currency offset optimism that a new administration will be better able to pull the country out of its worst recession in a century. The Ibovespa ended the session up 0.9 percent after swinging between a gain of 2 percent and a 0.7 percent decline. The Bloomberg Commodity Index was little changed after rallying 3.6 percent in the prior two sessions. Brent crude rose 47 cents to settle at $46.70 a barrel after rising to as high as $48.19.

The MSCI Emerging Markets Index fell 0.2 percent to 806.68. The benchmark has declined 4 percent in May, trimming its gain in 2016 to 1.6 percent. A gauge of developing-nation currencies was little changed Thursday and has fallen 1.5 percent this month.

“My sense is that the selloff we have seen since early May was more a pause in the rally rather than a shift in sentiment," said Regis Chatellier, a strategist at Societe Generale SA in London.

Developing-nation assets have reduced this year’s advance as economic data from the U.S. and China stoked concern that the gains were excessive, given the outlook for global growth. They rebounded earlier this week as a recovery in raw-material prices boosted the prospects for exporters.

Brazilian stocks fluctuated between gains and losses after months of political turmoil culminated in Brazil’s Senate voting to suspend President Dilma Rousseff from office. The benchmark gauge has risen 21 percent this year on bets that a new government will be able to get Latin America’s biggest economy growing again. Chatellier said most of the momentum leading up to the ouster has already been factored into the country’s assets.

The Micex Index declined 0.5 percent in Moscow. Chinese shares in Hong Kong dropped to their lowest levels in two months. The Philippine Stock Exchange Index fell 1 percent, following a 5.8 percent jump over Tuesday and Wednesday.

Real Weakens

Brazil’s real weakened the most among developing-nation currencies, falling 0.8 percent. The currency reversed earlier gains after the central bank 20,000 reverse-swap contracts, a move equivalent to buying $1 billion in the futures market, overshadowing the Senate vote to push forward with an impeachment trial on allegations Rousseff illegally doctored fiscal accounts to mask the size of the budget deficit.

The yield gap over Treasuries for emerging-market debt narrowed three basis points to 395, according to JPMorgan indexes.

Developing-nation currencies are “less undervalued” after rallying in the previous three months, Kamakshya Trivedi, Goldman Sachs Group Inc.’s London-based strategist, said in a report. The U.S. lender prefers high-yielding currencies like the Russian ruble, Indian rupee, and is more neutral on Indonesia’s rupiah and Brazilian real as the macro backdrop may be less supportive in the months ahead, he wrote.

“While levels are clearly less compelling than in late January, the broad message -- that the combination of valuation and yield in emerging-market exchange rates looks attractive for the first time in several years -- remains intact," Trivedi wrote.

— With assistance by Lilian Karunungan, and Harry Suhartono

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