Emerging markets advance as Fed optimism sparks dollar weakness

London - Emerging-market currencies and bonds rallied as traders pushed back forecasts for when the Federal Reserve will increase US interest rates, bolstering demand for higher-yielding assets.

Most developing-nation currencies trading on Wednesday strengthened against the dollar, led by the South Korean won, Malaysian ringgit and South African rand. Russia’s rouble fell as oil declined for a second day, while the yuan strengthened the most in almost two weeks.

Government bonds rallied, with Polish and South African 10-year yields dropping to the lowest level this year. The rate on similar-maturity Indian notes was set for the lowest close since 2009.

With average bonds yields above 4%, emerging markets have become a refuge for investors seeking an alternative to near-zero rates in much of the developed world.

Continued loose monetary policy from the European Central Bank and US Federal Reserve will ensure emerging-market assets continue to be supported, Goldman Sachs money manager Owi Ruivivar said in an interview.

Traders have trimmed the probability of a Fed rate increase by year-end to 45%, from 48% on August 5.

"Emerging-market sentiment has really turned positive and now a lot of people are betting on a strong rally," said Guillaume Tresca, a senior strategist at Credit Agricole CIB in Paris, who recommends buying the Hungarian forint and Polish zloty.

"With low volatility, the environment is good for carry trades, which is why the South African rand and Turkish lira are performing strongly."

Investors who borrow in dollars to invest in debt of higher-yielding currencies have taken home 9.4% from South Africa in the past month, the most worldwide.

The MSCI Emerging Markets Currency Index rose 0.6% as of 12:05 p.m. in London, extending a rally in the past five days to 1.8%. The MSCI Emerging Markets Index of shares gained 0.5%, heading for its highest close since July 2015.

Currencies

The South African rand advanced 0.9% to the strongest level against the dollar since October 16. Moody’s Investors Service said on Monday results from municipal elections may create the opportunity for the country to escape from low growth.

Turkey’s lira climbed for a fifth day, gaining 0.6% to the highest level in three weeks. Turkish President Recep Tayyip Erdogan and his Russian counterpart Vladimir Putin agreed to deepen economic cooperation during a meeting on Tuesday as they seek to restore ties that soured after a deadly encounter between their air forces last year.

The yuan strengthened the most in almost two weeks on bets China’s policy makers are focusing on exchange-rate stability as the economy shows increasing signs of a recovery. The won appreciated 1.1% after S&P Global Ratings raised South Korea’s credit rating one level on Monday to AA, the third-highest investment grade.

The dollar dropped against its major counterparts for a second day, retreating 0.5%.

Bonds

Poland’s 10-year bonds advanced for a second day, with the yield dropping 1 basis point to 2.69%, the lowest level since December 2. The rate on similar-maturity South African bonds fell 11 basis points to 8.44%, the least since November 24.

Turkish five-year notes advanced for a third day, with the yield dropping 2 basis points to 9.43%. India’s 10-year bonds advanced for a second day, with the yield dropping four basis points to 7.09%.

The premium investors demand to own emerging-market bonds rather than US Treasuries was unchanged at 346 basis points, according to JPMorgan Chase indexes.

"We have been incredibly constructive on emerging-market fixed income," said Ruivivar, who co-manages the $5.7bn GS Emerging Markets Debt Portfolio that has gained 13% in the past year.

"We’re in an environment where you’ve got liquidity for longer in the developed world."

Mongolia’s $1bn Eurobond due 2022 fell, with the yield rising 129 basis points to 8.43%, the highest since July on a closing basis, after the finance ministry said an economic "crisis" plan is needed for the government to avoid default.

Stocks

Eight of the 10 emerging-market equity industry groups rose, led by consumer-staple companies and utilities. Benchmark equity indexes rallied 1.7% in Vietnam, and 0.5% in both Sri Lanka and Taiwan.

"As rate-increase expectations get moved further out, equities tend to rally as investors are forced to move further out the risk curve," Logan Best, vice president for securities trading at INTL FCStone Financial Inc. in Winter Park, Florida, wrote in an e-mail.

Serbia’s main index BELEX15 rose 3%, as Messer Tehnogas AD, a Belgrade-based manufacturer of industrial gasses, gained 9.2% on speculation it may either announce a 2015 dividend or completion of an acquisition by Germany’s Messer Group GmbH, which already owns around 82% of the company, according to Milos Bijanic, a financial analyst at Belgrade-based Sinteza Invest Group.