Emerging Assets Retreat Second Day as Fed Rate Concern Deepens

  • Stocks extend drop from year high as traders boost rate bets
  • Turkish assets retreat after Fitch cuts outlook on credit

Fed Moves: What Have Markets Priced In?

Emerging-market currencies and stocks fell for a second day as commodities declined and comments from a Federal Reserve official fueled speculation that there will be a U.S. interest-rate increase this year.

Russia’s ruble and other currencies of oil-exporting nations declined as Brent crude fell below $50 a barrel and Fed Vice Chairman Stanley Fischer indicated that a 2016 rate move is still under consideration. Raw-material producers including Vale SA dragged the Ibovespa lower for a third day in Sao Paulo. Shares in Shanghai retreated the most in three weeks. Turkish assets fell after Fitch Ratings cut the outlook on the country’s credit.

Emerging markets extended declines from one-year highs reached last week as commodity prices dropped and traders boosted bets for an increase in U.S. interest rates on the back of hawkish Fed comments. Investors will turn their attention this week to reports on housing, jobs and consumer sentiment to gauge whether the world’s largest economy is strong enough to withstand higher borrowing costs. The focus will shift to Janet Yellen’s speech Friday in Jackson Hole, Wyoming, for further clues on the path of monetary policy.

“High-yielding currencies like the rand and the lira are under pressure,” said Guillaume Tresca, a senior strategist at Credit Agricole CIB in Paris, who recommends selling those two currencies. “Markets are getting a good reminder that the Fed is still on course to do something. Emerging markets will remain on a back foot until Yellen’s speech.”

Currencies

The MSCI Emerging Markets Currency Index dropped 0.3 percent, narrowing this year’s advance to 6 percent. The ruble dropped 1.4 percent. The Colombian peso weakened 1.1 percent. South Korea’s won dropped 0.8 percent.

Fischer said the U.S. economy is already close to meeting central bank targets. The comments followed San Francisco Fed President John Williams saying last week that the September meeting is “in play” for a rate move. The probability of an increase by the end of the year rose to 52 percent on Monday from 42 percent on Aug. 12, according to fed fund futures trading data compiled by Bloomberg.

Fischer’s comment “have cemented more firmly in the markets minds that hikes will happen this year as a result of views around his position on the FOMC and being close to Yellen,” said Peter Attard Montalto, senior emerging-markets strategist at Nomura International Plc in London.

Turkey’s lira weakened 0.4 percent. Fitch cut the outlook on the country’s investment grade credit to negative from stable on Friday after a failed coup attempt in July increased political risks. The rupee slipped 0.2 percent after India named Urjit Patel to take over from Raghuram Rajan as central bank governor from Sept. 4.

Stocks

The MSCI Emerging Markets Index slid 0.7 percent to 904.22. The measure closed Thursday at the highest level since July 2015. The developing-nation gauge has advanced 14 percent this year and is valued at 12.5 times 12-month estimated earnings. That compares with 4.2 percent gain in the MSCI World Index which trades at multiple of 16.3.

All 10 industry groups in the emerging-market index fell Monday. The Ibovespa dropped 2.2 percent as Vale, the world’s biggest producer of iron ore, declined 3.7 percent from the highest highest level since April. The Shanghai Composite Index dropped 0.9 percent. The Borsa Istanbul 100 Index slipped 0.3 percent.

Saudi Arabia’s Tadawul All Share Index lost 1.7 percent. Oil fell 2.7 percent to $49.50 a barrel in London.

Bonds

The yield on Turkey’s two-year note jumped 17 basis points to 9.17 percent, the highest since Aug. 11.

The rate on 10-year South African bonds rose five basis points to 8.52 percent. The yield on similar-maturity Russian securities increased three basis points to 8.36 percent.

The extra yield investors demand to own emerging-market debt over Treasuries rose four basis points to 336, after falling to the lowest level in more than a year on Friday, according to JPMorgan Chase & Co. indexes.

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