Emerging-Market Stocks, Currencies Fall After Hawkish Fed Signal

  • Fed raises rates, boosts outlook for borrowing costs in 2017
  • Brazil’s real and Mexico’s peso tumble to Wednesday’s lows

Emerging-market stocks and currencies fell after the Federal Reserve forecast a steeper path for borrowing costs in 2017, dimming the outlook for riskier assets.

The slump in developing nations deepened on Wednesday as the U.S. central bank lifted interest rates for the second time since 2006 and said inflation expectations have increased. Traders pushed down the value of those assets even after Chair Janet Yellen said changes in projections were “very modest.”

  • The MSCI Emerging Markets Index of stocks fell 0.5 percent at 4 p.m. in New York
  • Brazil’s Ibovespa led losses among the world’s biggest equity markets
  • Eighteen out of the 24 currencies in developing nations tracked by Bloomberg retreated against the dollar
  • Mexico’s peso and Brazil’s real dropped at least 1 percent
  • The MSCI Emerging Markets Currency Index slipped 0.1 percent, while the Bloomberg JPMorgan Latin America Currency Index halted a two-day advance

Reaction to Fed:

  • “I think the Fed was more hawkish than expected,” said Win Thin, the head of emerging markets at Brown Brothers Harriman & Co. “EM is selling off, and rightfully so”
  • “We expect weakness in EM FX for the coming 6 months to reflect these rate hikes,” said Georgette Boele, a currency and commodity strategist at ABN Amro Bank NV
  • “While U.S. monetary policy will likely lead to some weakness in EM, I expect the expansion of U.S. fiscal policy may have a far more reaching impact over the next couple years,” said Robert Rauch, a money manager at Gramercy Fund Management LLC
  • “U.S. fixed-income instruments will be yielding more, putting pressure on EM assets,” said David Tawil, co-founder of Maglan Capital. “So for fixed-income investors and equity investors, the U.S., is now the best place to invest”

What Else?

  • Some of Brazil’s biggest market players are joining economists in predicting an anemic rebound for Latin America’s largest economy next year
  • Europe’s biggest fund manager says it’s still not time to buy Turkish bonds, even after the largest selloff in emerging markets this quarter
  • China’s commitment to letting market forces determine the daily yuan reference rate is about to be tested, according to UBS Group AG and ING Groep NV
  • Argentina’s political setback on income tax legislation signals declining governability, increased fiscal stress and credit risk, Nomura analyst Siobhan Morden writes
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