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London - Emerging-market currencies fell, extending their worst monthly decline since August, as mounting signs the Federal Reserve will raise interest rates in June and July diminished the allure of higher-yielding assets.
Asian currencies led the retreat after Fed chair Janet Yellen said the strengthening US economy would probably warrant an increase in borrowing costs “in the coming months.”
The rand depreciated for a second day and a gauge of stocks in the Gulf Cooperation Council dropped to a three-month low as Brent crude slipped further below $50 a barrel. China weakened the yuan fixing as the Bloomberg Dollar Spot Index extended its biggest monthly advance since September 2014. The closure of UK and US markets for holidays diminished trading volumes.
Fed Funds futures jumped on Friday after Yellen’s comments supported the possibility for one to two US rate increases this year, with odds of a hike by July climbing to 54% on Monday from 26% at the start of May. Developing-nation shares have fallen in five of the past six weeks as investors shifted out of riskier assets, paring the MSCI Emerging Markets Index’s 2016 gain to 1.7%.
“People are digesting Yellen’s speech,” said Guillaume Tresca, a senior emerging-market strategist at Credit Agricole CIB in Paris, who recommends selling high-yielding developing-market currencies such as the rand against the dollar.
“There’s been a repricing of Fed rate-hike expectations, so the environment will be less supportive for emerging markets in the days ahead."
Yellen will host her colleagues on the Federal Open Market Committee in Washington June 14 to June 15, when they will contemplate a second interest-rate increase following seven years of near-zero borrowing costs that ended when they hiked in December.
Currencies
The MSCI Emerging Markets Currency Index declined 0.4% by 13:50 and is down 3.1% in May, on course for the first monthly weakening since January. The won, the biggest decliner among 24 emerging markets tracked by Bloomberg, retreated 1% and is Asia’s worst performer this month after Malaysia’s ringgit.
The yuan fixing was cut by 0.45% versus the greenback, sending the Chinese currency to a four-month low. The exchange rate headed for the steepest monthly decline since the August devaluation in onshore trading.
The ringgit depreciated 0.9%, bringing May’s rout to 5.2%. The rand lost 0.4% versus the dollar. The currency’s 9.8% drop in May is the worst in emerging markets, followed by the Colombian and Mexican pesos.
Bonds
Fixed-income markets joined the regional slide in currencies, with bonds in South Africa, Turkey and Poland declining. The Bloomberg Emerging Market Local Sovereign Index has declined 2.4% in May, also the most since August. Bonds in developing countries are likely to lose their appeal when the Fed raises rates, with yields on Treasuries due in a decade little changed at 1.85% on Monday.
South Korea’s 10-year bond yield rose three basis points to 1.81% and Malaysia’s climbed five basis points to 3.94%. Hungarian bonds gained, bucking the regional trend and pushing the yield on 10-year debt up three basis points to 3.41%.
Stocks
Asian shares mostly erased earlier losses, with those in Taiwan and Thailand among the biggest gainers. Lotte Shopping in South Korea fell to the lowest since January after losing television broadcast time. The Bloomberg GCC 200 Index of shares in the oil-exporting region declined 1% as Saudi Arabia’s benchmark slid 1%.
The MSCI Emerging Markets Index lost 0.1%, taking May’s drop to 3.9%. All 10 constituent industry groups bar one have lost ground since the end of April, with materials and energy stocks falling the most.
The emerging-markets measure is trading at 11.6 times projected 12-month earnings, below the MSCI World Index’s multiple of 16. Trading volumes on the index were about 77% of normal, according to data compiled by Bloomberg.
The Hang Seng China Enterprises Index of mainland companies traded in Hong Kong advanced 0.3% to a three-month high. The Philippine Stock Exchange Index rose 0.7% as Philippine Long Distance Telephone jumped 9% and Globe Telecom rallied 5.6% after the companies agreed to buy San Miguel’s telecoms assets for $1.5bn.
Romania Banca Transilvania fell 12% in Bucharest after going ex-dividend, pulling the BET Index down 2.1%. The Micex Index increased to the highest level this month in Moscow.
