Emerging-Market Stocks Rise as Yellen Reiterates Dovish Outlook

  • Fed chair signals that optimism on U.S. economy has softened
  • Developing-nation price swings are widest since late April

Emerging-market stocks advanced for a third day after Federal Reserve Chair Janet Yellen signaled that policy makers might be taking a more cautious outlook on the economy, boosting bets that they’ll keep U.S. interest rates lower for longer.

The MSCI Emerging Markets Index rose 0.5 percent to 825.35, pushing its three-day advance to 3.2 percent. Developing-nation assets have advanced in four of the past five days after the Fed kept rates on hold last week, with officials damping expectations of rate increases this year. The outlook for continued low U.S. interest rates offset concern that Britain will leave the European Union, a move that would ripple through global markets.

Yellen, in testimony before lawmakers, said the Fed is on watch for “whether” the economy would show clear signs of improvement, a subtle change from less than a week ago when she said they were waiting to see “when” it would. Futures traders see a 10 percent chance of an increase in U.S. interest rates next month and less than 50 percent odds of a move this year.

“It seems clear that the Federal Reserve is in no rush to increase interest rates and will be very cautious in assessing the timing of the hike, which is good for emerging markets,” William Jackson, London-based senior economist at Capitol Economics, said by phone. “The Federal Reserve is weighing the developments in Europe, the Brexit vote, and the economic data in the U.S.”

2016 Advance

Low U.S. borrowing costs have supported demand in emerging markets as a weaker U.S. dollar pushes investors toward riskier assets in developing nations. The equity benchmark has increased 3.9 percent this year and trades at 11.9 times the projected 12-month earnings of its members. Historical 30-day volatility in the gauge has jumped to the highest level since late April as traders weighed the chances of Britons deciding to leave the EU at a vote this week.

Yellen, who cited the U.K. referendum as a factor in the Fed’s decision to leave interest rates unchanged last week, is testifying before lawmakers in Washington on Tuesday and Wednesday. While the latest polls suggested momentum is with the campaign to remain in the EU, Prime Minister David Cameron’s impassioned plea to the British public to consider their children’s futures before voting suggested that he may be less convinced.

“Earlier anxieties about Brexit have faded a bit and we have been seeing more optimistic sentiment being reflected in markets,” said Chung Sung Yoon, a currency analyst at Hyundai Futures Corp. in Seoul. “But worries are still there. Markets are moving more cautiously after recent rallies.”

Brazil, Russia

Nine out of 10 industry groups in the developing-nation equity benchmark advanced, led by a 0.9 percent increase in telecommunications stocks.

Equity gauges in Poland and Hungary, among the countries that could be most affected by a British exit from the EU, each rose more than 0.9 percent. The Ibovespa jumped 1 percent. Brazilian stocks rallied as bets that the country’s acting president can win lawmakers’ support for an economic recovery plan outweighed concern that phone carrier Oi SA’s record bankruptcy filing will spread to other companies.

The South African rand increased 0.8 percent, leading gains in emerging-market currencies. Malaysia’s ringgit jumped 0.7 percent. The MSCI Emerging Markets Currency Index added less than 0.1 percent, pushing its three-day advance to 1.2 percent.

Lira, Forint

The lira fell 0.1 percent after rising as much as 0.4 percent against the dollar. Turkish policy makers lowered the overnight-lending rate by 50 basis points to 9 percent, matching the median estimate of 22 analysts. It left its other two rates unchanged.

Hungary’s forint fell 0.6 percent against the euro. The currency stayed weaker after the central bank left rates unchanged, in line with 20 of the 22 economists surveyed by Bloomberg.

India’s rupee slid 0.3 percent, weakening for a second day after overseas holdings of the nation’s debt fell by the most since March. The currency dropped to a four-week low on Monday following Reserve Bank of India Governor Raghuram Rajan’s weekend announcement that he’d leave his post when his term ends in September.

The premium investors demand to own emerging-market sovereign debt over Treasuries decreased four basis points to 391, according to JPMorgan Chase & Co. indexes.

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