Emerging Currencies Drop on Fed Rate Bets as Turkish Stocks Jump

LAGOS, Nigeria, Capital Markets in Africa: Emerging-market currencies fell with stocks as mounting speculation the Federal Reserve is moving closer to raising interest rates undercut the appeal of riskier assets. Turkish equities and the lira rallied the most among peers as the deputy prime minister survived a cabinet reshuffle.

The MSCI Emerging Markets Currency Index weakened 0.2 percent as currencies in Malaysia and South Korea led declines. Russia’s ruble headed for the longest losing streak since December, tracking oil lower. Shares in Istanbul gained 2 percent and the lira appreciated the most since May 5 as Mehmet Simsekretained his position as Turkey’s deputy prime minister. Hungarian bonds climbed amid wagers the central bank will lower borrowing costs on Tuesday.

Developed-country assets have tumbled this month, partly reversing a two-month rally, as comments from Fed policy makers drove up odds for higher U.S. interest rates as early as this summer in a move that will make dollar-denominated assets more attractive. Oil’s retreat since crossing $49 a barrel last week in London is also damping demand for assets of exporters like Russia, which rely on the commodity for the bulk of revenue.

“Risk off sentiment is back,” said Aurelija Augulyte, a strategist at Nordea Markets in Copenhagen, who favors the Mexican peso among emerging-market currencies. Hawkish Fed comments and concerns over global growth that are putting pressure on commodities is “resulting in emerging-market weakness,” she said.

Fed Bank of Philadelphia President Patrick Harker on Monday said he could see two to three rate hikes in 2016, while San Francisco Fed chief John Williamssaid that number of increases are still “about right.” Fed Chair Janet Yellen is due to deliver remarks on Friday. 

Currencies 
The MSCI Emerging Markets Currency Index retreated to the lowest level since May 19 by 12:19 p.m. in London. The ringgit weakened the most among 24 developing-country peers. In a probe related to state investment company 1Malaysia Development Bhd., Singapore’s central bank ordered BSI SA’s unit in the city-state to shut down for breaches of money laundering rules.

Russia’s ruble lost 0.2 percent in its fifth day of declines as Brent crude, used to price the nation’s main export blend, fell 0.6 percent to $48.08 a barrel. The South Korean won slid 0.8 percent after data showed overseas funds cut their holdings of the nation’s debt.

The lira bucked the selloff, reversing an earlier loss that had briefly pushed it past 3 per dollar. Simsek, the last man standing from the team of ruling party officials feted by investors as the driving force behind Turkey’s rapid growth years, has kept his job as deputy prime minister. The currency rallied 0.9 percent to 2.9676.

“Turkey is strong because Simsek was kept in government,” said Maarten-Jan Bakkum, a senior strategist at NN Investment Partners in The Hague who favors Indian shares over Brazil’s. “The key drivers to watch remain the Fed and China.”

Stocks 
The MSCI Emerging Markets Index decreased 0.3 percent as all but one of 10 industry groups retreated, led by a 0.8 percent drop in a gauge of technology companies. The broader measure has fallen 6.4 percent in May after jumping more than 13 percent in the previous two months.

The decline this month has pushed the average valuation of the index to 11.2 times projected 12-month earnings from above 12 times in April. It’s still trading at a discount to the MSCI World Index of developed-nation stocks, which has a multiple of 15.7.

Shares in South Korea and Taiwan lost at least 0.5 percent, while the Shanghai Composite Index decreased 0.8 percent, led by commodity producers, amid speculation raw-material prices will extend declines as a faltering economic rebound curbs demand.

The Borsa Istanbul 100 Index jumped 2.4 percent also as Turkey’s central bank lowered interest rates, helping the measure post the biggest gains worldwide.

Bonds 
The rally in Turkish assets extended to the bond market, where yields on 10-year government debt plunged 39 basis points to 10.01 percent. The central bank cut the overnight lending rate by 50 basis points to 9.5 percent.

Russian Eurobonds due in September 2023 climbed for the first time in six days, lowering the yield 11 basis points to 3.92 percent. The country is in the process of selling its first Eurobond since sanctions were imposed over the conflict in Ukraine, although it was unclear how much foreign interest there was in the dollar-denominated debt since the only underwriter is a state-run bank.

Hungarian five-year bond yields fell two basis points to 2.39 percent. The country will probably cut its benchmark by 15 basis points to 0.9 percent, according to a median estimate of 20 economists surveyed by Bloomberg.

The premium investors demand to own emerging-market debt over U.S. Treasuries was little changed at 399 basis points, according to JPMorgan Chase & Co. indexes.

Source: Bloomberg Business News