Emerging Assets Trim Weekly Rally After ECB Damps Stimulus Hopes

LAGOS, Capital Markets in Africa: Emerging-market stocks and currencies trimmed the biggest weekly gain in a month after the European Central Bank refrained from pledging more stimulus and North Korea conducted its biggest-ever nuclear test.

The won dropped and the Kospi index suffered its worst retreat for two months after North Korea’s fifth nuclear test. Malaysia’s ringgit and Russia’s ruble fell and stocks in Brazil were poised to open lower as Brent crude slid the most in more than a week. South Africa’s rand and South Korean sovereign bonds retreated after ECB President Mario Draghi damped expectations he’ll expand asset purchases beyond March. Turkish debt declined as data showed economic growth slowed in the second quarter.

By downplaying the likelihood for additional stimulus, the ECB’s decision raised questions about how much further the emerging-market rally can run as stocks trade near 14-month highs and bond yields remain close to the lowest levels since 2013. Investors are also looking for clues on when the Federal Reserve will start raising interest rates again, staunching flows to funds seeking higher returns in developing nations.

“Today there is some small profit taking after the ECB didn’t promise any additional measures,” said Hertta Alava, head of emerging markets at FIM Asset Management Ltd. in Helsinki, who favors stocks in Hong Kong and Russia. “Monetary policy globally is still very stimulative, so I don’t see this as a turning point.”

Emerging-market debt and equity funds registered the 10th straight week of inflows in the period ended Sept. 7, Bank of America Merrill Lynch said in a note today, citing EPFR Global data.

Currencies

The MSCI Emerging Markets Currency Index declined 1 percent as of 1:55 p.m. in London, heading for a five-day gain of 0.4 percent. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 peers, gained 0.4 percent after rising by a similar amount on Thursday. Bets the Federal Reserve will raise U.S. interest rates by the end of 2016 rose to 61 percent from 59 percent on Thursday.

Russia’s ruble dropped for the first time this week, shedding 0.7 percent, as Brent crude shed 2 percent in London to $48.9 a barrel. Poland’s zloty was steady against the euro ahead of a Moody’s Investors Service review of the country’s credit rating.

Taiwan’s dollar weakened 0.6 percent, the rand declined 1.6 percent and the won closed down 0.7 percent. Brazil’s real dropped 1.3 percent.

Stocks

The MSCI Emerging Markets Index fell 1.5 percent, reducing its gain this week to 1.5 percent. Health-care and consumer shares led declines.

The Kospi Index dropped 1.3 percent in South Korea, the most since July 6. BGF Retail Co. dropped 12 percent in Seoul after EToday reported the company’s chairman said he was seeking to sell his 3 percent stake.

Poland’s WIG20 declined 1.8 percent, heading for the biggest one-day fall since June 27, as copper producer KGHM Polska Miedz SA fell 3.4 percent. Markets

Ibovespa futures in Brazil declined 1.3 percent as prices of commodities used by raw-materials producers fell. Such companies account for 23 percent of the Ibovespa’s weighting.

in Taiwan, the Philippines and Indonesia shed more than 1 percent each.

Bonds

The premium investors demand to own developing-market bonds over U.S. Treasuries gained one basis point to 324.

Developing-nation sovereign bonds fell after Draghi’s comments. The yield on South Korea’s 10-year notes rose five basis points to 1.52 percent.

Turkey’s 10-year yield increased 18 basis points to 9.72 percent, the biggest one-day jump since July 21, after the statistics bureau said gross domestic product grew 3.1 percent in the April-to-June period, compared with 4.7 percent in the previous quarter. The yield on South Africa’s comparable maturity climbed for the first time in more than six days, advancing 15 basis points to 8.76 percent.

Source: Bloomberg Business News