Russian Stocks Give Up Gains as Fed Outlook Chokes Risk Appetite

  • Micex Index retreats from record high after Dudley comments
  • Russia stock inflows almost doubled to $65 million last week

Russian stocks reversed gains, ending a rally that drove them to record highs, as signals the Federal Reserve may be prepared to raise interest rates as soon as next month undermined appetite for riskier assets.

The benchmark Micex Index declined 0.5 percent to 1,968.07 by 5:42 p.m. in Moscow, erasing an earlier gain of as much as 0.9 percent, as New York Fed President William Dudley warned investors they’re underestimating the likelihood of increases in borrowing costs. The ruble weakened 0.2 percent and yields on 10-year government debt increased.

The selloff highlighted risks to a rally that’s been largely predicated on expectations for the Fed to hold off on tightening monetary policy this year, an outlook that sent the MSCI Emerging Markets Index to the highest level since July 2015 and the 50-member Micex to an all-time high on Monday. Odds for U.S. policy makers to increase borrowing costs in December climbed to 50.5 percent after Dudley’s comments, compared with 45 percent yesterday.

"Emerging markets are locally overbought, so the reaction to Dudley’s comments is predictable," Vladimir Vedeneev, the chief investment officer at Raiffeisen Asset Management in Moscow, said by e-mail. "It looks like the market is still going with the flow, but the game is getting more and more dangerous."

Russian assets declined even as Brent crude, used to price the nation’s main export blend, climbed for a fourth day to $48.42 a barrel on Tuesday. Inflows into Russian stocks almost doubled to $65 million in the week through Aug. 10, according to Sberbank CIB.

The ruble fell to 64.125 per dollar and Russia’s 10-year bond yield climbed two basis points to 8.36 percent.

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