Emerging Markets Resume Decline as Traders Weigh Brexit Odds

  • Energy shares slump most as Brent crude falls for a sixth day
  • Nigerian stocks gain most in world as naira set to float

Measuring the Fed's Impact on Emerging Markets

Developing-nation equities resumed declines and currencies weakened as traders weighed the prospect of Britain leaving the European Union.

The MSCI Emerging Markets Index erased Wednesday’s gain, falling 1 percent to 799.78. Energy companies dropped the most among 10 industry groups as oil prices tumbled. The Micex Index sank 1.1 percent in Moscow. A gauge of developing-nation currencies slipped 0.2 percent. It pared a decline of as much as 0.5 percent as Oddschecker’s survey of bookmakers’ implied probability of the U.K. leaving the EU slid below 38 after earlier surpassing 44. A vote is scheduled for next week. Nigerian stocks rallied after the central bank said it will abandon the naira’s peg.

“All short-term focus is on Brexit because of the possible implications that would have for the rest of the EU that forms a major part of the global economy,” said Simon Quijano-Evans, chief emerging-market strategist at Commerzbank AG in London, who downgraded bonds of Poland, Hungary and Croatia in April on Brexit risks. “We need to get past June 23 to see anything else become market-moving.”

Brexit Risk

The Bank of England repeated its warning that quitting the bloc threatens to damage the nation’s growth prospects after Federal Reserve Chair Janet Yellen said on Wednesday that Britain’s exit from the EU could have consequences for the global economy. Emerging markets are vulnerable because a victory for the “Leave” campaign may trigger a flight to safer assets, while countries in the EU’s east including Poland and Hungary stand to lose key financial support from a British pullout.

The Fed kept U.S. interest rates unchanged on Wednesday. Central bankers in the U.K. and Japan refrained from expanding monetary stimulus on Thursday, while Indonesia cut its benchmark interest rate for the fourth time this year.

Thursday’s decline trimmed the MSCI Emerging Markets Index’s advance this year to 0.7 percent. The gauge trades at 11.6 times the 12-month estimated earnings of its members, a 26 percent discount to the MSCI World Index, which has retreated 2.1 percent in 2016.

“The Fed decision was largely expected, while Brexit is still not fully discounted,” said Tony Hann, the London-based head of equities at Blackfriars Asset Management, who favors stocks in India, Thailand and the Philippines.

Russia, Poland

The Micex Index fell to a three-week low. Oil, Russia’s biggest export, fell for a sixth day in London, the longest losing streak since January.

Poland’s WIG20 Index fell 2.2 percent to the lowest close in four months. PZU SA, the nation’s largest insurer, was the biggest drag on the gauge with a 3.3 percent drop after Gazeta Polska reported the country’s anti-corruption agency took documents from PZU’s offices related to one of its software development projects. PZU confirmed Thursday authorities seized documents, saying the company will clarify all issues.

The Ibovespa jumped 1 percent after reversing a 1.7 percent decline. Lenders Itau Unibanco Holding SA and Banco Bradesco SA contributed the most to the Brazilian equity gauge’s gain, each rising at least 1.5 percent.

Nigeria Rally

The Hang Seng China Enterprises Index of mainland stocks listed in Hong Kong slumped 2.3 percent. The Shanghai Composite Index slipped 0.5 percent.

The Nigerian Stock Exchange All Share Index jumped 2.1 percent, the most among 94 primary equity indexes tracked by Bloomberg. Nigerian Breweries Plc advanced the most since January and Zenith Bank Plc climbed to a three-week high. Investment into Nigeria has shriveled as foreigners are put off by capital controls, while local businesses have struggled to import raw materials and equipment.

The MSCI Emerging Markets Currency Index declined 0.2 percent, following Wednesday’s 0.2 percent advance. The South African rand slid 0.5 percent to the weakest closing level against the dollar in two weeks.

Three-month non-deliverable naira forwards were at 315 per dollar, suggesting investors expect the currency to trade around that level. Nigeria has held the exchange rate at 197-199 per dollar since March last year, spending about $2.7 billion -- 9.3 percent of its foreign reserves -- to defend the peg this year alone.

For more on Nigeria’s free float and its implications, click here.

The yield on South Korea’s 10-year notes fell five basis points to a record 1.58 percent. Russia’s five-year government bonds declined, lifting the yield three basis points to 9.12 percent.

The premium investors demand to own emerging-market sovereign debt over Treasuries increased two basis points to 410, according to JPMorgan Chase & Co. indexes.

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