Emerging Stocks Wipe Out 2016 Gains as Traders Weigh Fed Timing

  • U.S. policy makers see June rise likely if economy warrants
  • Rand tumbles to two-month low amid rising political tension

What Repricing Can We Expect for the Yuan?

Emerging-market stocks erased their gains for this year and currencies weakened as speculation mounted that Federal Reserve officials may move more quickly to increase U.S. interest rates than recently forecast.

The MSCI Emerging Markets Index fell 0.9 percent to 794.22. The benchmark equity gauge extended declines after minutes from the Fed’s meeting last month showed that most policy makers said an interest-rate increase would be appropriate in June if the economy continued to improve. Chinese stocks dropped to the lowest levels since March. The Ibovespa fell for a fourth day in Sao Paulo. South Africa’s rand tumbled to a two-month low amid rising political tension over the finance minister’s future. 

Developing-nation stocks ended a two-day advance after Atlanta Fed President Dennis Lockhart and San Francisco’s John Williams said on Tuesday that two increases this year may be warranted, while Dallas Fed President Robert Kaplan said a boost may come soon. U.S. data showing accelerating inflation and faster new-home construction released yesterday also bolstered the case for higher borrowing costs.

Fed Futures

“The Fed is signaling a hawkish approach in that it is ready to act faster than what has been priced into the market,” said Wayne Lin, a New York-based money manager at QS Investors LLC, whose firm oversees $17 billion assets including emerging market exchange-traded funds. “This would ultimately mean a stronger dollar and depressed growth in emerging markets, and make it marginally a more difficult environment for growth in currencies and equity.”

Fed futures now show a 63 percent chance for a rate increase in September, compared with 37 percent on Monday.

The MSCI Emerging Markets Currency Index fell 0.5 percent to the lowest level since March. A gauge of the greenback against 10 peers rose 0.8 percent.

Low U.S. borrowing costs have supported developing-nation assets as traders sought higher returns in riskier markets. A rally in emerging markets has faded on concern the Fed may speed the pace of increases. Wednesday’s decline left the equity benchmark unchanged the year and reduced the currency gauge’s gain to 2.3 percent.

Rand Slumps

The rand fell 2.1 percent after Finance Minister Pravin Gordhan denounced allegations he had spied on taxpayers while running the national revenue service. A newspaper report on Sunday alleged he remains at risk of being charged with espionage and fired.

In Asia, South Korea’s won and currencies in Malaysia and Indonesia each declined at least 0.6 percent.

The Ibovespa dropped 0.6 percent, reversing a gain after the Fed’s minutes were released. Vale SA, the world’s largest iron-ore producer, and the Brazilian state-run oil company Petroleo Brasileiro SA were among the worst performers on the gauge.

Yield Spread

The Hang Seng China Enterprises Index lost 1.5 percent. The Shanghai Composite Index dropped 1.3 percent and South Korea’s Kospi measure retreated 0.6 percent.

President Xi Jinping vowed this week to press ahead with plans to cut capacity at state-owned enterprises, even as data over the weekend showed industrial production, fixed-asset investment and retail sales missed estimates. Oil would plunge back to levels last seen at beginning of 2016 if China slips into recession, Russian Deputy Finance Minister Maxim Oreshkin said at a conference in Moscow.

The premium investors demand to own emerging-market debt over U.S. Treasuries narrowed six basis point to 386, according to JPMorgan Chase & Co. indexes.

South African and Turkish bonds fell, with the yield on 10-year notes in Johannesburg rising 10 basis points to 9.48 percent, the highest since Jan. 28. The yield on similar-maturity Turkish notes rose 13 basis points.

In Poland, the yield on 10-year notes rose nine basis points to 3.02 percent. Morgan Stanley this week joined a majority of analysts surveyed by Bloomberg who predict Polish policy makers will extend a 14-month run of keeping borrowing costs unchanged, marking a reversal in its outlook that rates would fall 50 basis points this year.

Chinese sovereign bonds fell, pushing the 10-year yield up three basis points to 2.97 percent.

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