Emerging Markets Trim Weekly Gain as ECB Adds to Fed Anxiety

  • TRY and ZAR decline, while RUB and CLP lead currency gains
  • EM facing difficult ‘balancing act’ in 2017, SocGen Says

Emerging-market stocks and currencies fell for the first time this week as investor sentiment soured on the European Central Bank’s pledge to cut debt purchases and the prospect of higher U.S. interest rates loomed.


  • The MSCI Emerging Markets Index dropped 0.2 percent, trimming its weekly gain to 2.9 percent, the most since September
  • The MSCI Emerging Markets Currency Index pared its weekly advance to 0.7 percent
  • Turkey’s lira and South Africa’s rand slumped
  • Chile’s peso rallied to a one-month high; Russia’s ruble rose even after Credit Suisse Group AG said investors betting that U.S. President-elect Donald Trump will roll back sanctions on Moscow are misguided

Assets in developing nations climbed this week before the European Central Bank announced plans on Thursday to extend quantitative easing until the end of 2017, while at the same time cutting monthly debt purchases. Eastern European currencies dropped the most among peers on the statement. Traders now turn their attention to next week’s Federal Reserve meeting with odds for an interest-rate increase at 100 percent.

Comment

“Emerging markets face a difficult balancing act in 2017,” said Societe Generale SA analysts including Guy Stear and Jason Daw. “Domestic fundamentals are improving, but the developed world is becoming more protectionist, weighing on global growth potential in an environment of rising US interest rates, ECB tapering, and surging political risks in Europe.”

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Other Markets

  • Brazil’s Ibovespa stock gauge fell 0.3 percent; Mexican shares advanced
  • Onshore yuan dropped most in two weeks after PBOC weakens yuan fixing most since Oct. 21

Recommendations

  • ECB announcement adds to negative impulses in emerging markets, Brown Brothers Harriman strategist Win Thin says in note. Biggest beneficiaries of low, developed market rates will be the biggest losers going forward, including ZAR, TRY, and BRL
  • Societe Generale advises investors to go long on the dollar versus the won: South Korea’s currency is “in the cross-hairs from a perfect storm of Fed tightening, higher U.S. 10-year yields, protectionist and geopolitical risk premium, and a Chinese first-half growth slowdown coupled with ongoing renminbi depreciation,” analysts Daw and Amit Agrawal write in note


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