Emerging Assets Decline as Fed Move in June Seen as Possibility

  • Fed minutes stoke speculation that June increase is possible
  • Developing-nation equities, currencies fall to March lows

Markets Play Catch Up on Fed Rate Hike Expectations

Emerging-market stocks and currencies fell to two-month lows as Federal Reserve minutes revived the possibility of an interest-rate increase as soon as next month, raising the specter of capital flows out of riskier assets.

Raw-material producers led Brazilian equities to a one-month low. Egyptian stocks sank as the disappearance of an EgyptAir plane into the Mediterranean was the latest blow to the country’s efforts to rebuild its economy. South African gold mining companies dropped, ending a four-day rally in the nation’s benchmark gauge. Stocks in the Middle East slid to a five-week low as oil prices retreated. The ruble fell the most among currencies. The premium investors demand to hold emerging-market sovereign bonds over U.S. Treasuries rose for the first time in four days.

Minutes of the April Fed meeting showed most officials judged a rate increase next month to be appropriate if the economy improves in the second quarter. That followed repeated assertions by policy makers that the markets may have underestimated the likelihood of action at the June 14-15 meeting. Following the release, traders of Fed funds futures sent the odds of a June move to 26 percent from 4 percent on Monday.

“Bets for a June Fed hike have gone through the roof, providing a negative backdrop for emerging-market assets,” said Joseph Dayan, the head of markets at BCS Financial Group in London. “We have had a good run and some investors were looking to take profit. This was the trigger that allowed that profit-taking to happen.”

Stocks

The MSCI Emerging Markets Index dropped 1.6 percent to 781.84. All 10 industry subgroups fell, led by energy and commodity companies. The benchmark gauge trades at 11.1 times projected 12-month earnings, the cheapest since February, after wiping out its gains for the year.

The EGX 30 Index dropped 1.8 percent. An EgyptAir Airbus Group SE A320 carrying 66 people is presumed to have crashed in the Mediterranean on an overnight flight Thursday from Paris to Cairo. The incident follows a string of aviation-related events involving Egypt, including the October crash of a Russian airliner en route from Sharm-el-Sheikh to St. Petersburg that killed 224 people. An EgyptAir flight was hijacked to Cyprus in March.

Brazil, Russia

The Ibovespa declined 0.9 percent in Sao Paulo. Steelmakers Usinas Siderurgicas de Minas Gerais SA and Cia. Siderurgica Nacional SA fell the most on the benchmark gauge.

AngloGold Ashanti Ltd. tumbled 5 percent in Johannesburg and Gold Fields Ltd. lost 6.1 percent as the precious metal dropped for a second day. The FTSE/JSE Africa All Share Index slid 0.8 percent.

Stock gauges in Russia and India each fell more than 1 percent. The Shanghai Composite Index was little changed, while a gauge of Chines companies traded in Hong Kong slipped 0.7 percent.

Equities in Pakistan extended a record high on speculation MSCI Inc. may upgrade the nation to an emerging market from frontier status. The index provider, which put Pakistan on its review list, will announce the decision by June 14. An upgrade may lead to inflows into the market, according to Hasnain Malik, head of frontier-markets strategy at London-based Exotix Partners.

The MSCI Emerging Markets Currency Index fell 0.7 percent, taking its decline in May to 3.2 percent. The ruble declined 1.2 percent. Oil, Russia’s biggest export, fell 0.2 percent to $48.81 a barrel in London.

The premium for emerging-market bonds over Treasuries widened nine basis points to 395, according to JPMorgan Chase & Co. indexes.

The yield on Russia’s 10-year securities increased seven basis points to 8.93 percent. The Indonesian yield rose 17 basis points to 7.87 percent as the central bank left borrowing costs unchanged.

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