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Emerging markets retreat for second day after Fed comments

Seoul - Emerging-market currencies and stocks fell as commodities declined and comments from a Federal Reserve official strengthened speculation there will be a US interest-rate increase this year.

Russia’s rouble and South Korea’s won led currencies lower as oil dropped toward $47 a barrel and Fed Vice Chairman Stanley Fischer indicated that a 2016 rate hike is still under consideration.

Shares in Shanghai retreated the most in three weeks and Saudi Arabia led declines in Gulf stocks. Turkish assets fell, with the yield on two-year notes climbing to a one-week high, after Fitch Ratings cut the outlook on the country’s credit.

Emerging markets extended declines from one-year highs reached last week as commodities dropped and traders boosted bets for rate increases on the back of hawkish Fed comments.

Investors will turn their attention this week to U.S reports on housing, jobs and consumer sentiment to gauge whether the economy is strong enough to withstand higher borrowing costs. The focus will shift to Janet Yellen’s speech on Friday in Jackson Hole, Wyoming, for further clues on the path of monetary policy.

"High-yielding currencies like the rand and the lira are under pressure," said Guillaume Tresca, a senior strategist at Credit Agricole CIB in Paris, who recommends selling those two currencies.

"Markets are getting a good reminder that the Fed is still on course to do something. Emerging markets will remain on a back foot until Yellen’s speech."

Currencies

The MSCI Emerging Markets Currency Index dropped 0.3% as of 2:28 p.m. in London, leaving this year’s advance at 6%. The rouble dropped 0.9%, while the won and Chilean peso both retreated 0.8%.

Fischer said the US economy is already close to meeting central bank targets. The comments followed San Francisco Fed President John Williams saying last week that the September meeting is "in play" for a rate move.

The probability of a rate increase by the end of the year rose to 54% on Monday from 42% on August 12, according to fed fund futures.

"Comments over the weekend from FOMC’s Stanley Fischer have cemented more firmly in the markets minds that hikes will happen this year as a result of views around his position on the FOMC and being close to Yellen," said Peter Attard Montalto, senior emerging-markets strategist at Nomura International in London.

Turkey’s lira weakened 0.5%. Fitch cut the outlook on the country’s investment grade credit to negative from stable on Friday after a failed coup attempt in July increased political risks. The rupee slipped 0.2% after India named Urjit Patel to take over from Raghuram Rajan as central bank governor from September 4.

Stocks

The MSCI Emerging Markets Index slid 0.5%. The measure closed on Thursday at the highest level since July 2015. The developing-nation gauge has advanced 14% this year and is valued at 12.5 times 12-month estimated earnings. That compares with 4.1% gain in the MSCI World Index which trades at multiple of 16.3.

All 10 industry groups in the emerging-market index fell. Brazil’s Ibovespa, the Shanghai Composite Index and the Borsa Istanbul 100 Index dropped at least 0.6%.

Saudi Arabia’s Tadawul All Share Index led declines in Gulf stocks, losing 1.7%. Oil slid 2.1% to $47.49 a barrel in New York.

Zhuzhou CRRC Times Electric tumbled 8.5%, the biggest decline in the MSCI gauge and the most in more than a year, after recommendations were cut by Credit Suisse Group and UOB-Kay Hian Holdings.

Bonds

The yield on Turkey’s two-year note jumped 17 basis points to 9.17%, the highest since August 11.
The rate on 10-year South African bonds rose four basis points to 8.51%, and Russia’s yield increased two basis points to 8.35%.

The extra yield investors demand to own emerging-market debt over Treasuries rose three basis point to 335, after reaching the lowest close in more than a year on Friday, according to JPMorgan Chase indices.

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