Emerging Assets Post Weekly Drop as Fed Angst Fuels Volatility

  • Russian bonds drop as central bank says easing done for 2016
  • Gauge of developing-nation exchange rates declines with oil

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Emerging-market stocks and currencies extended declines for the week as falling commodity prices damped the outlook for exporters and traders weighed the chances that central banks in the U.S. and Japan will continue policies that have supported demand for riskier assets.

The MSCI Emerging Markets Index posted its steepest five-day drop in more than four months, with raw-material stocks falling the most. Yields on Russian 10-year government notes had their biggest weekly increase since July as policy makers said easing is over for 2016 after they cut the key rate by 50 basis points. The dollar strengthened against most of its Group-of-10 peers after a report showed U.S. consumer prices increased more than forecast.

Emerging assets have been whipsawed this month with price swings widening as investors await fresh signals from Fed policy makers indicating how quickly they will tighten policy. The market-implied probability of a move by year-end increased to 55 percent on Friday from less than 50 percent a day earlier. Economists are divided over whether the Bank of Japan, which meets next week on the same days as the Fed, will add to its unprecedented stimulus and keep money flowing into higher-yielding assets.

“We are bound to continue seeing intraday volatility in emerging markets based on Fed-watching, oil prices and dollar action,” said Simon Quijano-Evans, an emerging-market strategist at Legal & General Group Plc in London. “There is room for emerging markets to advance until year-end, although more subdued.”

Several markets across Asia and the Middle East markets were shut for holidays this week.

Stocks

The MSCI Emerging Markets Index fell 0.4 percent to 885.45. Historical 15-day volatility, a measure of price swings during the period, is around the highest level since mid-July. The measure fell 2.6 percent this week.

The Micex Index declined 0.7 percent in Moscow as energy producers including Lukoil PJSC and Gazprom PJSC retreated with crude prices. Oil, Russia’s biggest export, fell 1.8 percent, to $45.77 a barrel in London. The Ibovespa dropped 1.4 percent in Sao Paulo as Brazilian raw-material producers including Vale SA declined.

India’s S&P BSE Sensex Index jumped 0.7 percent, advancing for a third day. The Philippines Stock Exchange PSEi Index retreated 2 percent, following Thursday’s 2.2 percent rebound, and was down 0.4 percent for the week. Equity benchmarks in Thailand and Indonesia rose.

Markets in China, Taiwan, Malaysia, South Korea and Hong Kong were shut Friday.

Bonds

The premium investors demand to own emerging-market debt over U.S. Treasuries rose three basis points to 347, according to JPMorgan Chase & Co. indexes. The spread widened 17 basis points this week.

The yield on Russian government bonds maturing in 2027 jumped 10 basis points to 8.22 percent, bringing the weekly increase to 17 basis points.

“No cut later in 2016 is a chilly shower for bonds right now,” said Vladimir Miklashevsky, trading desk strategist at Danske Bank A/S in Helsinki. “Russian bonds would like to see a second cut in 2016.”

The MSCI Emerging Markets Currency Index fell 0.1 percent after rising 0.1 percent on Thursday and was down 0.6 percent for the week.

The ruble weakened 0.5 percent on oil’s decline and after the benchmark rate was lowered to 10 percent, in line with the median estimate of analysts surveyed by Bloomberg. The Indonesian rupiah gained 0.1 percent. South Africa’s rand strengthened 0.5 percent.

A measure of volatility in developing-nation currencies was around the highest level since late June.

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