Emerging Assets Drop as Investors Reassess Fed Rate Move Timing

Updated on
  • Russian stocks retreat from record high as Brent crude falls
  • Traders put odds of September U.S. rate increase at 36%

Emerging-market assets ended a two-day advance as traders shifted away from riskier assets after Federal Reserve officials signaled that policy makers may raise U.S. interest rates this year.

The MSCI Emerging Markets Index fell to a three-week low, while South Korea’s won slid the most among developing-nation currencies. Fed Chair Janet Yellen said Friday the case for tightening had strengthened. That message was reinforced by Vice Chairman Stanley Fischer, who said in an interview on CNBC that the possibility exists for two increases this year. Stocks in Russia retreated from a record high as Brent crude fell for the first time in three days. Lenders led declines in Istanbul-traded stocks as Turkish economic confidence plunged by the most on record going back to 2012.

Yellen’s latest comments have undermined the case for investing in emerging-market assets because they offer higher yields than developed nations where central banks are keeping borrowing costs low to prop up growth. The MSCI Emerging Markets Currency Index erased its gains this month as the odds of a U.S. rate increase by September jumped to 36 percent from zero two months ago.

“The market has realized that the Fed meant it when it said two hikes are possible this year, repricing the September Fed hike chance,” said Aurelija Augulyte, a strategist at Nordea Markets in Copenhagen, who favors the Mexican peso as a beneficiary of U.S. macroeconomic momentum. “This pulls the dollar up,” so it’s negative for “dollar financing needs and puts pressure on commodity prices.

The MSCI Emerging Markets Currency Index dropped 0.7 percent. The won weakened 1 percent. The rand fell for a seventh day, its longest losing streak since January, declining 0.3 percent. South Africa’s credit rating may be cut and the exchange rate would “buckle” if Finance Minister Pravin Gordhan is removed from his post, according to Goldman Sachs Group Inc.

Brazil’s real strengthened 1 percent after suspended President Dilma Rousseff spoke to defend herself from impeachment in the closing stages of her trial before the Senate. Investors are betting she will be permanently removed from office this week, giving legitimacy to a new administration that has pledged to shore up the country’s finances and restore growth.

The MSCI Emerging Markets Index fell 0.6 percent to 895.97, narrowing its gain in August to 2.6 percent. All 10 industry groups dropped Monday, led by health-care and consumer staples stocks.

Russia, Turkey

The Micex Index fell 0.3 percent in Moscow as energy producers Lukoil PJSC and Novatek OJSC each slid more than 1 percent. Oil, Russia’s biggest export, fell 1.3 percent in London, staying below $50 a barrel for a sixth day amid doubts producers will agree on a deal to stabilize the market when suppliers meet next month for informal talks.

The Borsa Istanbul 100 Index fell 1.3 percent, led by Akbank TAS and Turkiye Garanti Bankasi AS. An index of Turkish economic confidence plunged 24 percent to 72.66 in August, the lowest reading since February, from 95.73 in July, according to the country’s statistics office.

The premium investors demand to own emerging-market debt over U.S. Treasuries increased four basis points to 333 after declining for the past two days, according to JPMorgan Chase & Co. indexes.

The yield on South African local bonds due in December 2026 rose five basis points to 9.02 percent as a stand-off between Gordhan and the country’s police force weighed on rand-denominated assets. The yield on similar-maturity Russian notes increased two basis points to 8.29 percent.

Emerging-market dollar sovereign bonds have returned about 7 percent in the past three months and yield an average of 4.2 percent, according to a Bloomberg index.

“Some investors are using this fresh talk about Fed rate as an excuse to sell and realize their gains,” said John Teja, a director at PT Ciptadana Securities in Jakarta. “The Fed rate concerns could also lead to outflows by foreign investors.”

— With assistance by Y-Sing Liau

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