Emerging Stocks Decline as Fed Rate Bets Outweigh Oil Rebound

  • Ruble gains for first time in five days as crude advances
  • Lira strengthens as Simsek stays on as Turkey’s deputy PM

Emerging-market stocks fell for the first time in three days as mounting speculation that the Federal Reserve will raise interest rates as soon as next month outweighed a rebound in oil prices.

The MSCI Emerging Markets Index declined 0.1 percent to 787.99. Health care and technology stocks were among the worst performers as seven of 10 industry groups declined. Turkey’s benchmark gauge advanced 3.5 percent and the lira strengthened as Mehmet Simsek retained his position as deputy prime minister. Russia’s ruble climbed for the first time in five days.

Developing-nation assets have tumbled this month as comments from Fed policy makers drove up odds for higher U.S. interest rates as early as June, a move that would make dollar-denominated assets more attractive. Data Tuesday showing new U.S. home purchases surged to the highest level since 2008 further supported the case for an increase. Political turmoil in countries from Brazil to Turkey and fluctuations in the price of crude have also contributed to an outflow this month of almost $5 billion from exchange-traded funds that invest in emerging markets.

Fed Odds

“Emerging markets are going to be quite volatile in the coming month as we approach the June Fed meeting,” said Simon Quijano-Evans, chief emerging-market strategist at Commerzbank AG in London, who favors Russian, Colombian, Romanian and Indonesian local bonds. “On top of that, you will have a steady stream of negative and positive idiosyncratic political noise coming out of individual countries such as Brazil, South Africa or Turkey.”

Traders are now pricing in a more than one-in-three chance of a rate increase in June, from 4 percent last Monday, after Fed minutes showed officials are willing to make such a move if the economy shows sustained improvement.

The MSCI Emerging Markets Currency Index fell 0.1 percent, extending this month’s loss to 2.9 percent. JPMorgan Chase & Co. said in a research note Tuesday that the three “pillars” that supported the rally early this year -- a dovish Fed, signs of stabilization in China and rebounding oil prices -- “seem to be crumbling.” Strategists led by Gordian Kemen said they “are now bearish on both EM local rates and hard currency debt, while remaining underweight EM FX.”

The lira rallied 1.7 percent against the dollar. Simsek, the last man standing from the team of ruling party officials feted by investors as the driving force behind Turkey’s rapid growth years, has kept his job as deputy prime minister. Turkey’s central bank also lowered interest rates.

Ringgit, Ruble

“Turkey is strong because Simsek was kept in government,” said Maarten-Jan Bakkum, a senior strategist at NN Investment Partners in The Hague who favors Indian shares over Brazil’s. “The key drivers to watch remain the Fed and China.”

The ringgit weakened 1 percent. In a probe related to state investment company 1Malaysia Development Bhd., Singapore’s central bank ordered BSI SA’s unit in the city-state to shut down for breaches of money laundering rules. The South Korean won slid 0.8 percent after data showed overseas funds cut their holdings of the nation’s debt.

Russia’s ruble advanced 0.9 percent as Brent crude, used to price the nation’s main export blend, approached $49 a barrel. South Africa’s rand and the Colombian and Mexican pesos each gained at least 0.2 percent.

A 6.2 percent decline in emerging-market stocks this month has pushed the average valuation of the benchmark index to 11.3 times projected 12-month earnings from more than 12 times in April. The MSCI World Index of developed-nation stocks trades at a multiple of 15.9.

Brazil, Turkey

Brazilian stocks ended a seven-day slide after the nation’s budget minister was forced to step down over allegations he wanted to obstruct a graft probe, while acting President Michel Temer said he’ll propose limits to government spending. The Ibovespa rose less than 0.1 percent after jumping as much as 1.4 percent.

The rally in Turkish assets extended to the bond market, where yields on 10-year government debt plunged 37 basis points to 10.03 percent. The central bank cut the overnight lending rate by 50 basis points to 9.5 percent.

Russian Eurobonds due in September 2023 climbed for the first time in six days as the country sold its first Eurobond since sanctions were imposed over the conflict in Ukraine. The government placed the 10-year notes at a yield of 4.75 percent on Tuesday, according to Finance Minister Anton Siluanov.

The premium investors demand to own emerging-market debt over U.S. Treasuries declined three basis points to 397, according to JPMorgan Chase & Co. indexes.

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