Emerging-Market Volatility Near Brexit Level Before Fed, BoJ

  • South African rand rises for fifth day, leading currency gains
  • Equity benchmark fluctuates between gains and losses

The Fed and BOJ Ripple Effect on Emerging Markets

Volatility in emerging markets hovered near the highest level since June as traders awaited verdicts on monetary policy from the Federal Reserve and the Bank of Japan.

The MSCI Emerging Markets Index rose 0.1 percent to 898.82 on Tuesday after reversing a 0.1 percent decline. Equity benchmarks in Brazil, the Philippines and Qatar gained at least 0.7 percent, while measures in Turkey and India retreated. South Africa’s rand extended its longest winning streak since June while the Russian ruble fell as oil prices dropped. Hungarian bonds rallied for a third day as investors awaited details of the central bank’s easing measures.

Price swings in developing-nation assets have picked up in the past month as odds for the Fed to raise interest rates at its September meeting fluctuated from as low as 18 percent to as high as 42 percent. Investors who ploughed money into emerging-market exchange-traded bond and stock funds in the past 16 weeks are waiting to see what U.S. and Japanese policy makers will decide on Wednesday to determine the sustainability of the rally.

Shifting sentiment around the Fed and Bank of Japan “is the driver of volatility right now,” said Tony Hann, the head of equities at Blackfriars Asset Management in London. Blackfriars, whose Oriental Focus Fund has outperformed 95 percent of peers this year, hasn’t changed its positioning before the decisions and doesn’t foresee U.S. rates changing this year, Hann said.

Price Swings

The JPMorgan Chase & Co. Emerging Market Volatility Index was at 10.68 on Tuesday, up from 9.96 on Sept. 1. It touched 10.88 last week, representing the widest price swings since the week that followed Britain’s vote to leave the European Union.

The MSCI Emerging Market Index has risen 0.6 percent in September, setting it on course for its smallest monthly gain since it dropped in May. A 13 percent rally in the measure this year has pushed the average valuation of its member companies to 12.4 times estimated 12-months earnings, a 22 percent discount to the MSCI World Index of advanced-country stocks.

A gauge of developing-nation energy companies ended the session little changed after falling as much as 0.8 percent. Brent crude fell for a third day, settling below $46 a barrel for a third day on speculation a global oil glut will persist. South African oil and gas producer Sasol Ltd. retreated 2.5 percent. Novatek OJSC slumped 4.1 percent in Moscow. Kommersant newspaper reported that Russia is considering increasing its gas extraction tax rate.

Brazil, Thailand

The Ibovespa gained 0.7 percent in Sao Paulo. The Brazilian equity benchmark rose for a second day as President Michel Temer reinforced his commitment to reforms aimed at restoring economic growth and winning back investors’ confidence.

Thailand’s SET Index ended a five-day rally, dropping 1.3 percent. Some investors probably have “big concern” after foreigners began selling domestic equities on Monday, Tawatchai Asawapornchai, deputy managing director at ASL Securities, said by phone.

The MSCI Emerging Markets Currency Index was little changed after rising 0.4 percent on Monday.

The rand appreciated 0.7 percent, bringing its five-day advance to 3.5 percent, the most among 24 developing countries. Russia’s ruble weakened 0.2 percent.

Bonds

The Hungarian forint fell less than 0.1 percent versus the euro. While Hungary’s policy makers kept the benchmark three-month deposit rate unchanged Tuesday, the central bank will announce details on a limit to the amount of deposits lenders can keep with it in an attempt to ease policy.

The premium investors demand to own emerging-market debt over U.S. Treasuries narrowed three basis points to 340, according to JPMorgan indexes. The spread widened 16 basis points last week.

Hungary’s local-currency bonds due in October 2027 rose, reducing the yield by four basis points to 2.86 percent. The yield on 10-year South African bonds fell two basis points to 8.6 percent. The probability that South Africa’s sovereign credit rating could be cut in November by Moody’s Investors Service is about a third, the company’s Vice President Zuzana Brixiova told reporters in Johannesburg on Tuesday.

Russian bonds slid for a third day, with yields on 2027 debt climbing two basis points to 8.3 percent. The Bank of Russia said on Friday it wouldn’t cut interest rates for the rest of the year after reducing its benchmark by 50 basis points to 10 percent that day.

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