Emerging Markets Rise as Fed Seen Keeping Slow Tightening Pace

  • Czech two-year yield dips below Swiss rate to world’s lowest
  • PDVSA bonds decline as Venezuela extends swap deadline

Emerging-market stocks rose the most in three weeks and currencies gained as mixed U.S. economic data bolstered speculation the Federal Reserve will remain accommodative.

Commodity producers led gains in Sao Paulo as the Ibovespa rose for a fourth consecutive day. Benchmark gauges in China, India and the Philippines each jumped at least 1.4 percent. South Africa’s rand and the Mexican peso strengthened the most among currencies. The Czech Republic briefly surpassed Switzerland with the world’s lowest bond yields, while Petroleos de Venezuela SA’s notes fell after the state oil company said it would push back a deadline to swap debt.

Emerging markets extended this year’s gains after reports on Monday showed New York manufacturing unexpectedly shrank and U.S. factory output barely grew, boosting optimism the Fed won’t quicken the pace of interest-rate increases. A rebound in commodities and improving earnings forecasts for developing-nation companies has prompted analysts to raise profit forecasts, while stimulus measures by central banks in Europe and Asia have increased demand for debt in the developing world.

“The longer we don’t have an interest-rate hike in the U.S., the better for emerging markets,” Heinz Ruettimann, an analyst at Julius Baer Group Ltd. who favors Chinese equities, said by phone from Zurich. In emerging markets “We see indications that profitability is improving. Our entire focus over the next three months is the third-quarter earnings season in Asia, the U.S. elections and whether or not we will see a U.S. rate hike in December.”

Investors will be looking at China’s report on third-quarter economic growth on Wednesday before the third and final U.S. presidential debate. Futures traders predict a 63 percent chance the Fed will raise rates in December.

Stocks

The MSCI Emerging Markets Index rose 1.6 percent to 908.55 as 10 of the 11 industry groups advanced.

The Ibovespa gained 1.7 percent. Petroleo Brasileiro SA, the Brazilian state-controlled oil company, contributed the most to the advance, jumping 3.1 percent. Iron-ore producer Vale SA increased 2.6 percent.

X5 Retail Group NV climbed 5.2 percent to a five-year high in London after the Russian retailer said sales growth accelerated to 30 percent in the third quarter. Competitor Magnit PJSC jumped 4.3 percent in Moscow trading, contributing the most to a 0.6 percent gain in the Micex Index.

China, India

The Hang Seng China Enterprises Index rose 1.9 percent, its biggest advance since Aug. 1. China’s economy probably expanded 6.7 percent in the three months through September from a year earlier, according to the median estimate of analysts surveyed by Bloomberg.

The Philippine Stock Exchange Index surged 2.9 percent, the most since May. President Rodrigo Duterte started a four-day trip to China on Tuesday, and there’s optimism it will yield investment deals and boost tourism, said James Lago, head of research at PCCI Securities Brokers Corp. in Manila.

India’s S&P BSE Sensex rose 1.9 percent as Housing Development Finance Corporation Ltd. and ICICI Bank Ltd. advanced at least 3.8 percent each. Mastek Ltd., an Indian software company, jumped 13 percent after net income surged.

Currencies, Bonds

The MSCI Emerging Markets Currency Index rose 0.4 percent as the Bloomberg Dollar Spot Index fell 0.2 percent. The rand strengthened 1.8 percent, while the Mexican peso gained 1.4 percent against the greenback.

“The latest economic data from the U.S. has raised more uncertainties about whether the Fed can raise their interest rates this year,” said Andy Ferdinand, head of research at PT Samuel Sekuritas in Jakarta. “Some people might see this as something positive for emerging-market assets,” he said, adding that he still advised a cautious approach due to risks including the U.S. election and corporate earnings.

The yield on the Czech Republic’s two-year notes fell to a record low of minus 0.97 percent in early trading on Tuesday, seven basis points below Switzerland. It has since risen back above the Swiss yield.

Saudi Arabia intends to sell debut dollar-denominated bonds due in five years for about 160 basis points over similar maturity U.S. Treasuries, 10-year notes at a spread of 185 basis points and 30-year securities at 235 basis points, according to people familiar with the matter. The bonds will be priced Wednesday.

PDVSA’s $4.1 billion of bonds due in November 2017 slipped 2.17 cents to 83.637 cents on the dollar. Venezuela’s state oil company pushed the deadline to Oct. 21 for bondholders to agree to exchange their notes for longer-maturity securities, according to a statement issued after the previous offer expired Monday evening.

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