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Emerging markets retreat amid hawkish signals

Oct 05 2016 15:56
Liau Y-Sing and Maria Levitov

Kuala Lumpur - Emerging-market stocks fell for the first time this week and currencies declined in Asia on signs central banks are turning hawkish, threatening the flow of funds to higher-yielding assets in developing nations.

South Korea’s won weakened to a two-week low after Bloomberg News reported the European Central Bank will probably wind down bond purchases before ending quantitative easing. Korean, South African and Thai bonds led a retreat in sovereign debt, while stock indexes in Russia, Dubai and the Philippines slumped.

Russia’s rouble and Brazil’s real advanced as oil gained more than 1.6%.

Dwindling prospects for ECB stimulus are clouding the outlook for developing markets as Federal Reserve officials bolster the case for raising rates, with Chicago Fed President Charles Evans saying Wednesday an increase is imminent.

The International Monetary Fund warned on Tuesday that rising political tensions over globalization threatened to derail the world-wide economic recovery.

“The mix of lower emerging-market growth outlook from the IMF is once again a key factor dragging back markets, especially with an eye to a Fed hike by end of year,” said Peter Attard Montalto, an emerging-markets economist at Nomura International in London, which recommends the Russian rouble over the Turkish lira.

“That’s been magnified through the ECB news from yesterday.”

Futures contracts on Tuesday showed a 60% chance of a Fed rate increase in December, from 50% a week earlier. The ECB may begin tapering its bond purchases in steps of €10bn a month before quantitative easing ends next March, the euro-zone officials said.

The IMF on Tuesday also lowered its 2017 growth forecasts for several developing nations including South Africa, Turkey and Colombia.

Currencies

The MSCI Emerging Markets Currency Index fell 0.2% to 1 549.7 as of 1:50 in London, heading for the lowest close since September 12. The won dropped 0.5% to the weakest since September 21.

The Thai baht depreciated 0.3% and the People’s Bank of China cut the yuan’s reference rate by 0.12%.  

The rouble rose 0.3% to 62.48 per dollar, extending the best performance in emerging markets since OPEC’s deal to cut production was announced, and the real added 0.7%.

Brent rose 1.9% to $51.8 a barrel, taking crude’s gain since September 27 to 12.8%, as US stockpiles declined to trim a supply glut. South Africa’s rand also added 0.6%, extending a gain since the end of June to 6.7%.

Stocks

The MSCI Emerging Markets Index fell 0.3%, paring a 1.1% advance over the previous three days. Eight of 11 industry groups declined, led by consumer stocks, while energy and real-estate gauges climbed.

PetroChina Company and Cnooc were among the biggest boosts to the measure, rising 3.3% and 3.8% in Hong Kong, respectively.

Zijin Mining Group Company slid 3.2% in Hong Kong, the biggest drop in a month, after gold futures slumped by the most in almost three years. LG Household & Health Care declined 4.5% in Seoul, the biggest decline since August 5.

The Philippine Stock Exchange Index fell 1% as data showed inflation beat estimates to rise to an 18-month high in September. Share indexes in Jakarta and Russia lost at least 1%.

The Hang Seng China Enterprises Index of mainland companies listed in China rose for a third day while Egypt’s EGX 30 extended three days of increases to 5.8% as investors bet the government will devalue the pound to alleviate a chronic shortage of dollars.

Bonds

The premium investors demand to own emerging-market debt over US Treasuries advanced two basis points to 329, according to JPMorgan Chase indices.

Turkish bonds fell, pushing the yield on 10-year bonds up five basis points. The yield on comparable maturity bonds from South Korea rose six basis points to 1.52%, as inflation beat estimates to rise to the highest level in seven months in September.

Yields on similar-maturity Thai and Malaysian securities climbed while Polish 10-year yields jumped to a three-month high.

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