Traders Whipsawed in Emerging Markets Awaiting Central Banks

  • Odds of September U.S. rate increase have narrowed to 20%
  • Economists divided on Bank of Japan’s stimulus plans

Emerging-market investors were whipsawed as they waited for central banks in the U.S. and Japan to review policies that have supported demand for higher-yielding assets.

A measure of volatility in developing-nation currencies held near the highest level since late June, and MSCI’s emerging-market equity benchmark swung between a gain of 0.5 percent and a 0.3 percent decline Thursday. The odds of a Federal Reserve interest-rate increase at its next meeting narrowed to 20 percent, from 28 percent a week ago, futures trading data compiled by Bloomberg show.

Price swings in developing-nation assets have been widening as investors wait to see if the Fed will raise interest rates next week before deciding if a continuation of a quarterly rally is justified. Economists are also divided over whether the Bank of Japan will add to unprecedented stimulus when it reviews policy on the same day as the Fed, a move that stands to boost demand for higher-yielding assets and keep money flowing into emerging markets.

“The most pressing issue right now is lingering fears of a Fed hike next week,” said Per Hammarlund, the chief emerging-market strategist at SEB SA in Stockholm, who favors ruble bonds and the Brazilian real. “The FOMC would risk making a historic mistake by hiking now. I think the rally will resume after the Fed decision next week, if not earlier. The conditions for it are still present.”

Investors have been flocking to higher-yielding assets in developing nations this quarter amid low global interest rates and relatively more attractive economic growth prospects. Emerging markets have pulled back after 15 weeks of inflows into exchange-traded funds helped drive equities to a 13-month high and bond yields to the lowest levels in three years.

The MSCI Emerging Markets Index ended Thursday’s session 0.4 percent higher at 888.98. The gain reduced the equity benchmark’s decline in the past four days to 2.2 percent. Fifteen-day historical volatility in the gauge, a measure of price swings during the period, is around the highest since mid-July.

The Ibovespa gained 1.5 percent in Sao Paulo. Lenders Itau Unibanco Holding and SA and Banco Bradesco SA contributed the most to the advance, each rising more than 2 percent. Dubai’s equity benchmark slumped 1.1 percent, as local markets reopened for the first time this week after holidays. In Russia, Sberbank PJSC and Gazprom PJSC lost at least 1 percent each, the biggest drags on the Micex Index, which slipped 0.4 percent.

Markets in Turkey, China, South Korea and Taiwan are closed for holidays.

‘Wait and See’

“Most markets are in a wait and see mode before the Fed,” said Hertta Alava, head of emerging markets at FIM Asset Management Ltd. in Helsinki, who favors stocks in Hong Kong and Russia. “My personal opinion is that it would be good if they would raise the rate next week, but also communicate that there won’t be further hikes this year.”

Vodacom Group Ltd. shares gained for a third consecutive day in Johannesburg, rising 0.7 percent. Africa’s largest mobile-phone company by market value won an estimated 5 billion-rand ($351 million) contract with the South African government.

The MSCI Emerging Markets Currency Index increased 0.1 percent, after closing little changed on Wednesday following three days of declines. The South African rand advanced 0.7 percent. The ruble added 0.6 percent as oil, Russia’s biggest export, rose for the first time in three days in London.

Rupee Weakens

India’s rupee fell 0.2 percent after a Finance Ministry official denied a report that the government may discuss a proposal to devalue the currency.

“For now the market should stay range-bound and wait for central banks to set the risk tone,” said Ken Cheung, a Hong Kong-based foreign-exchange strategist at Mizuho Bank Ltd. “Next week the market will likely turn more choppy. If the Fed raises rates sooner, Asian foreign-exchange markets will come under pressure on capital outflows. If the Bank of Japan fails to deliver, sentiment toward the region will take a hit as well.”

The premium investors demand to own emerging-market debt over U.S. Treasuries was unchanged at 344 basis points, according to JPMorgan Chase & Co. indexes.

Before it's here, it's on the Bloomberg Terminal.