Emerging-Market Assets Rally as Traders Scale Back Fed Rate Bets

  • Yellen less specific about timing in speech after jobs report
  • Odds of an interest-rate increase this month fall to 2%

The Geopolitical Risks Yellen Wants to Watch Out For

Emerging-market currencies and stocks rallied for a third day as the weakest U.S. jobs data since 2010 and comments by Federal Reserve Chair Janet Yellen that provided less specificity as to the potential timing of interest-rate increases propped up demand for riskier assets.

The Indonesian rupiah led a gauge of developing-nation currencies to its steepest one-day gain since March. The rand rallied 1.3 percent after South Africa’s credit rating was affirmed by S&P Global Markets on Friday. Consumer-discretionary stocks rose the most on the developing-nation equity benchmark. Banks and energy companies led gains in Russia as Brent crude sold for more than $50 a barrel.

The jobs report Friday crushed bets on the U.S. central bank increasing interest rates in the next two months, with the odds of a move in June falling to to 2 percent from 30 percent a week ago. Investors have returned to riskier assets in the last two weeks following a stock selloff that pared the MSCI Emerging Markets Index’s 2016 gain to 1.7 percent by the end of last month. Yellen, speaking at an event in Philadelphia Monday, said further “gradual increases” in the target interest rate will probably be appropriate, while omitting the “coming months” time frame she has previously provided.

“Yellen’s speech clearly indicates that the Fed is becoming more cautious,” Bruce McCain, who helps oversee $35 billion as chief investment strategist at Key Private Bank in Cleveland, said by phone. “Everybody can see that the Friday data came out weaker than we had expected, and so the overall trend is that the markets don’t expect the rate hike any time soon, which is good for emerging markets.”

The odds of a U.S. rate increase in July fell to 22 percent, according to Fed futures trading. The addition of 38,000 workers, the fewest since September 2010, followed a 123,000 advance in April that was smaller than previously estimated, U.S. Labor Department data showed on Friday.

For a QuickTake explainer on the U.S. monthly jobs data, click here

Currencies

The MSCI Emerging Markets Currency Index rose 1 0.7 percent.

India’s rupee climbed 0.4 percent before an interest-rate decision on Tuesday. All 19 economists in a Bloomberg survey see central bank Governor Raghuram Rajan keeping the benchmark repurchase rate at 6.5 percent.

The rand extended gains into a fifth day, its longest series of advances since November, after S&P Global Markets affirmed the South African country’s credit rating.

Malaysia’s currency, the worst performer in Asia last month, rose 1.1 percent. “The ringgit was oversold in the last month, so short-covering post payrolls is helping the currency,” said Sue Trinh, Hong Kong-based head of Asian foreign-exchange strategy at Royal Bank of Canada.

Brazil’s real strengthened 1.2 percent. The country’s gross domestic product is forecast to expand 0.85 percent in 2017, up from a previous estimated of 0.55 percent a week earlier, according to a central bank survey published Monday.

The Turkish lira weakened less than 0.1 percent after jumping the most in a week on Friday. Core inflation fell to 8.77 percent in May from 9.41 percent the previous month, a drop that gives encouragement the Turkish central bank can continue a cycle of interest-rate cuts that started in March.

Stocks

The MSCI Emerging Markets Index rose 0.9 percent to 825.97 as all 10 industry groups advanced.

Russia’s Micex Index rebounded 1.5 percent after slumping 1.1 percent over the last five trading days. The Hang Seng China Enterprises Index of mainland companies traded in Hong Kong rose for a seventh day. The Shanghai Composite Index ended a two-day gain before the release of economic data this week. Mainland markets will be closed after Wednesday for public holidays.

Russian bonds extended a two-day gain, cutting the yield on 10-year debt by 29 basis points during the period. Polish 10-year notes declined, pushing the yield up six basis points to 3.19 percent, the highest since January.

The premium investors demand to own emerging-market debt over U.S. Treasuries decreased five basis points to 392, according to JPMorgan Chase & Co. indexes.

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