Emerging Assets Suffer End-of-Week Rout as Stimulus Hopes Dashedby and
Stocks post worst losses since June as Brazil slides 3.7%
Developing-market bonds fall as Draghi downplays asset-buying
Emerging-market stocks and currencies suffered the worst daily losses since June as central bankers in the U.S. and Europe questioned the benefits of further monetary easing.
The MSCI Emerging Markets Index lost 1.9 percent, the most since the rout that followed Britain’s vote to leave the European Union, as Federal Reserve Bank of Boston President Eric Rosengren’s hawkish comments raised the odds for a U.S. interest-rate hike this year. A day earlier, ECB President Mario Draghi played down the prospect of boosting asset purchases, while DoubleLine Capital Chief Investment Officer Jeffrey Gundlach said it’s time to prepare for higher rates.
Stock indexes from Brazil to Poland tumbled at least 2.2 percent, while Colombia’s peso and the South African rand led losses as all of 24 developing-nation currencies monitored by Bloomberg retreated. Bonds slid across the emerging world, with Turkish 10-year yields climbing the most since July and those on similar Brazilian debt rising 21 basis points. The won depreciated after North Korea’s fifth nuclear test.
“It all revolves around what’s happening in developed-market central banks,” said Neil Shearing, the chief emerging-markets economist for Capital Economics in New York. “Comments from the Fed’s Rosengren that were a bit more hawkish have focused investors on the possibility of Fed rate hikes later this year. If U.S. rates go up, that sets a benchmark for global borrowing costs, and shifts flows out of risky assets.”
Investors have been scouring comments from Fed policy makers for clues on when the central bank will start raising interest rates again, threatening to staunch flows to funds seeking higher returns in developing nations. By downplaying the likelihood for additional stimulus, the ECB raised questions about how much further the emerging-market rally can run as stocks trade near 14-month highs and bond yields remain close to the lowest levels since 2013.
The selloff on Friday comes after emerging-market debt and equity funds registered the 10th straight week of inflows in the period ended Sept. 7, Bank of America Merrill Lynch said in a note today, citing EPFR Global data.
“Today, there is some small profit taking after the ECB didn’t promise any additional measures,” said Hertta Alava, head of emerging markets at FIM Asset Management Ltd. in Helsinki, who favors stocks in Hong Kong and Russia. “Monetary policy globally is still very stimulative, so I don’t see this as a turning point.”
Industry gauges tracking consumer-staple and material stocks slid 2.7 percent, the most on the MSCI Emerging Markets Index, which rose 1.1 percent for the week.
The Ibovespa fell the most in seven months as commodity prices decreased, dimming the outlook for Brazil’s exports. Such companies account for 23 percent of the Ibovespa’s weighting. The swoon in stocks combined with a drop in the real made Brazil the world’s worst-performing equity market in dollar terms on Friday.
Poland’s WIG20 declined 2.2 percent. Moody’s Investors Service refrained from reviewing the nation’s credit rating on Friday.
The Kospi Index dropped 1.3 percent in South Korea, the most since July 6. BGF Retail Co. dropped 12 percent in Seoul after EToday reported the company’s chairman said he was seeking to sell his 3 percent stake. North Korea conducted its fifth nuclear test on Friday, the anniversary of the reclusive nation’s founding, and said it was now able to produce miniaturized nuclear arms.
The MSCI Emerging Markets Currency Index lost 0.8 percent, reducing the weekly gain to 0.5 percent.
Russia’s ruble ended a five-day advance, falling 1.3 percent, as Brent crude retreated and Sberbank CIB said the second-best rally this year in emerging markets left the exchange rate overvalued. The Colombian peso lost 2.6 percent and the rand decreased for a third day.
The premium investors demand to own developing-market bonds over U.S. Treasuries increased five basis points to 329.
Turkey’s 10-year yield increased 19 basis points to 9.76 percent. Economic growth slowed to 3.1 percent in the April-to-June period from 4.7 percent in the previous quarter, according to data released on Friday.
The yield on South Africa’s similar-maturity debt climbed 14 basis points to 8.74 percent.