Emerging Market Rally Fades as Central Bank Angst Outweighs Oil

  • Bets for higher U.S. rates, ECB taper plans weigh on markets
  • Brent crude rises to the highest price since early June

The advance that has pushed emerging-market stock valuations to the highest levels in more than a year lost momentum as signs that central banks may pull back stimulus that has propped up demand for riskier assets outweighed rising oil prices.

The MSCI Emerging Markets Index ended the session little changed at 915.26 after slipping as much as 0.6 percent. Stock prices fluctuated after Bloomberg News reported that the European Central Bank will probably wind down bond purchases before ending quantitative easing. Energy stocks advanced and exchange rates in oil-exporting nations from Russia to Colombia strengthened as Brent crude rose to a four-month high.

The dwindling prospects for ECB stimulus come at the same time investors are growing increasingly certain that the Federal Reserve will raise U.S. interest rates by the end of this year. Chicago Fed President Charles Evans said Wednesday an increase is imminent. The International Monetary Fund warned on Tuesday that rising political tensions over globalization threatened to derail the world-wide economic recovery. Futures traders see a 63 percent chance of a December Fed increase, compared with 47 percent odds two months ago, according to data compiled by Bloomberg.

“The mix of lower emerging-market growth outlook from the IMF is once again a key factor dragging back markets, especially with an eye to a Fed hike by end of year,” said Peter Attard Montalto, an emerging-markets economist at Nomura International Plc in London, which recommends the Russian ruble over the Turkish lira. “That’s been magnified through the ECB news.”

Stocks

The ECB may begin tapering its bond purchases in steps of 10 billion euros ($11.2 billion) a month before quantitative easing ends next March, according to euro-zone officials who asked not to be identified because their deliberations are confidential. The IMF on Tuesday lowered its 2017 growth forecasts for several developing nations including South Africa, Turkey and Colombia.

The MSCI Emerging Markets Index has rallied 15 percent this year and trades at 12.5 times the projected 12-month earnings of its members. That compares with a 3.5 percent gain in the MSCI World Index of developed-nation stocks, which is valued at a multiple of 16.

Zijin Mining Group Co. slid 2.4 percent to a three-month low on Wednesday as gold futures slumped. Precious-metal producers including Pan African Resources PLC and Harmony Gold Mining Co. were among the worst performers in the FTSE/JSE Africa All Shares Index, which slipped 0.3 percent in its third decline in four days. The Philippine Stock Exchange Index fell 1 percent as data showed inflation beat estimates to rise to an 18-month high in September.

Egypt’s EGX 30 jumped 2.1 percent, rising for a third day as investors bet the government will devalue the pound to alleviate a chronic shortage of dollars. The Ibovespa gained 1.5 percent in Sao Paulo, led by a 4 percent advance in the Brazilian state-controlled oil company Petroleo Brasileiro SA.

Currencies

The MSCI Emerging Markets Currency Index fell 0.2 percent to the lowest closing level since Sept. 12. The South Korean won was the worst performer, weakening 0.5 percent. The Thai baht depreciated 0.3 percent.

The ruble rose 0.4 percent, extending the best performance in emerging markets since OPEC’s deal to cut production was announced. The Mexican peso strengthened 0.6 percent. Brent crude jumped 1.9 percent to $51.86, rallying as data showed U.S. oil stockpiles declined to trim a supply glut.

The premium investors demand to own emerging-market debt over U.S. Treasuries widened two basis points to 329, according to JPMorgan Chase & Co. indexes.

Turkish bonds fell, pushing the yield on 10-year securities up three basis points to 9.68 percent. The yield on comparable-maturity bonds from South Korea rose six basis points to 1.52 percent, as inflation beat estimates to rise to the highest level in seven months in September.

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