Emerging Markets Assets Drop as Local Risks Add to Fed Concern

  • Thai stocks, currency decline as king’s health in focus
  • Developing-nation equity benchmark falls to three-week low

Building Towards a Possible Fed Rate Hike in December

Emerging-market stocks fell to a three-week low and most currencies weakened as increasing domestic risks from Thailand to South Africa worsened sentiment already impaired by a fractious U.S. election campaign and increasing odds of a December Federal Reserve interest-rate move.

Assets in Thailand led declines amid concern about King Bhumibol Adulyadej’s health. Chinese shares traded in Hong Kong retreated the most this month amid speculation that fund flows from the mainland will reduce and the yuan will weaken. Russia’s Micex Index dropped with oil, and the nation’s sovereign bonds declined for a seventh day.

Developing-nation stocks have fallen 2.7 percent and currencies have lost 1.3 percent from 13-month highs reached in the past two months. The rally, which was spurred by investors seeking higher yields, stalled as markets factored in a higher probability of a U.S. interest-rate increase this year and fretted that an election victory for Republican Donald Trump may endanger trade deals.

“There are some specific stories that are sparking losses in individual markets like in Thailand,” said William Jackson, an emerging-market economist at Capital Economics in London. “There is a quite lot for investors to worry about regarding the U.S. elections and the Fed right now. But there are signs emerging-market fundamentals are improving and equities should rise once the external environment becomes more benign.”

Minutes of the Fed’s September policy meeting released Wednesday showed several U.S. central bankers said raising borrowing costs would be appropriate “relatively soon if economic developments unfolded about as the committee expected.” Futures traders currently assign odds of 68 percent for an increase in December, and a 17 percent chance of a move next month.

The MSCI Emerging Markets Index declined 0.3 percent to 902.74, falling for a second day. A gauge of developing-nation currencies slipped less than 0.1 percent, after losing 0.7 percent Tuesday.

Stocks

  • The benchmark SET Index in Bangkok dropped 2.5 percent, extending this week’s decline to 6.5 percent. The gauge has fallen since the royal palace said Sunday that 88-year-old King’s condition was unstable. The monarch’s health is closely watched as he is revered by many for what they say has been his unifying presence during a seven-decade reign.
  • The Hang Seng China Enterprises Index lost 1.3 percent. Chinese authorities aim to tighten control on speculative real estate investments and money involved in land transactions, people familiar with the matter said this week. The central bank weakened the yuan’s reference rate for a sixth day, the longest run of cuts in nine months.
  • The Micex Index declined 0.4 percent. Oil, Russia’s biggest export, fell for a second day in London on speculation OPEC’s agreement to trim crude output won’t succeed in reducing supply.
  • Saudi Arabia’s Tadawul All Share Index advanced for a third day as the kingdom prepared to meet investors this week about a plan to sell its first international bond.

Currencies

  • The baht was the worst performer among 24 developing-nation peers tracked by Bloomberg, weakening 1.2 percent.
  • Hungary’s forint lost 0.2 percent versus the euro after a minister said the government in Budapest was planning bond-market changes after regaining its investment grade at S&P Global Ratings last month.

Bonds

  • The cost of insuring against a debt default by South Africa in the next five years increased 1.6 percent to the highest level since July 7. Divisions within the governing African National Congress are deepening and a potential downgrade of South Africa’s debt rating to junk isn’t fully priced in by markets, according to Colin Coleman, a partner and head of Goldman Sachs Group Inc. in South Africa. Finance Minister Pravin Gordhan received a summons this week to appear in court in connection with a fraud case.
  • Russia’s 10-year bonds fell for a seventh day, sending yields up six basis points to 8.38 percent. The government sold floating-rate notes due 2020, raising all 10 billion rubles ($160 million) it targeted.
  • The premium investors demand to own emerging-market sovereign debt over U.S. Treasuries increased one basis point to 334, according to JPMorgan Chase & Co. indexes.

— With assistance by Jung Park, Giang Nguyen, and Y-Sing Liau

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