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Emerging stocks retreat as Fed hike bets mount

Jakarta - Developing-nation stocks retreated from a two-week high and currencies declined as mounting speculation the Federal Reserve will raise interest rates this year curbed demand for higher-yielding assets.

Eight of the 11 industry groups in the MSCI Emerging Markets Index fell, led by consumer goods and utility companies.

South Korea’s Kospi dropped the most in Asia on concern Chinese authorities are trying to limit the flow of visitors to the peninsula, and the won approached a three-month low after a report showed economic growth slowed last quarter. A gauge of currencies fell and the offshore yuan declined to a record.

Gains in US manufacturing and comments by Chicago Fed President Charles Evans favoring policy tightening boosted market-implied odds of a rate hike by December to 71% at a time when other major central banks are easing. Investors expecting the Fed to adopt a gradual pace of increases after a move this year are optimistic that developing-market shares will extend this year’s 16% rally.

“Some investors might react negatively to the higher probability of a Fed rate increase this year,” said Indra Mawira, an investment manager at Panin Asset Management in Jakarta.

“I still see the overall sentiment toward emerging assets as positive because the pace of the future US rate increases wouldn’t be aggressive.”

Stocks

The MSCI Emerging Markets Index fell 0.1% to 917.26 as of 08:06. The measure, which closed on Monday at its highest level since October 10, traded at 12.6 times the 12-month projected earnings of its constituents, data compiled by Bloomberg show. That compares with a multiple of 15.9 for the MSCI World Index, which has advanced 2.7% in 2016.

The Kospi dropped 0.5% as stocks that rely on Chinese tourists slumped on concern authorities on the mainland are ordering travel agents to curb cheap travel packages to South Korea amid rising tension over a missile-defense system.

Cosmetics companies Amorepacific and LG Household & Health Care were among the biggest decliners, plunging more than 7%. Hotel Shilla  and Grand Korea Leisure, a casino operator, slumped at least 5.5%.

Pakistan’s equity benchmark dropped 1.3%, while India and Vietnam’s declined 0.4% each. Taiwan’s Taiex index climbed 0.7%, set for highest close since June 2015, following gains in global technology share before Apple reports earnings.

Currencies

The MSCI Emerging Markets Currency Index retreated 0.1%, with the offshore yuan dropping to a record low as Chinese policy makers signaled they are willing to allow greater currency flexibility amid a slump in exports and an advance in the dollar.

The yuan traded in Hong Kong fell to 6.7885, the weakest intraday level in data going back to 2010. In Shanghai, the onshore currency was little changed at 6.7760, close to a six-year low and past the 6.75 year-end median forecast in a Bloomberg survey. 

Concern that China will allow the yuan to keep weakening put downward pressure on its Asian counterparts. The won dropped 0.4%, declining for the third time in four days after a central-bank report showed exports were a drag on South Korea’s economic growth last quarter. The Philippine peso lost 0.3%, while Taiwan’s dollar gained 0.2%.

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