Emerging Markets Extend Losses as Fed Wake-Up Call Halts Rally

LAGOS, Nigeria, Capital Markets in Africa: Emerging-market stocks fell for a second day and currencies retreated from a 13-month high as renewed prospects for a U.S. interest-rate hike this year sapped risk appetite.

Saudi Arabian shares dropped the most in almost three months and futures on Ibovespa declined on lower commodity prices. Egypt’s benchmark index slid for a second day as Commercial International Bank, which accounts for 40 percent of the gauge by weight, headed for the biggest drop in five weeks. Turkish bonds led sovereign debt lower. South Korea’s won and Brazil’s real weakened.

Futures traders boosted bets for Federal Reserve tightening this year, with a majority now expecting a move in December, after New York Fed President William Dudley said the markets may be underestimating the odds and Dennis Lockhart of Atlanta said accelerating economic growth may warrant at least one increase in 2016. Both stocks and currencies in developing nations are falling after the best year-to-date gains since 2009 spurred concern the assets had become pricey.

“Emerging markets have had a huge rally since Brexit and some profit-taking is only healthy,” said Nathan Griffiths, who helps oversee about $1.1 billion as a senior money manager at NN Investment Partners in The Hague. “If it was not Fed comments, it would have been something else. But as long as the dollar doesn’t strengthen from here and general monetary policy remains benign, the gains can resume.”

While Britain’s vote on June 23 to leave the European Union caused an immediate selloff in emerging-market assets, it also led investors to believe that the resulting economic uncertainty would compel the Fed to keep rates lower for longer. That optimism took stock valuations to a 15-month high and attracted almost $17 billion of inflows over the past 11 weeks into U.S. exchange-traded funds that invest in developing nations.

Stocks
The MSCI Emerging Markets Index dropped 0.8 percent to 908.67 at 9:07 a.m. in New York. The gauge had climbed 14 percent this year and trades at 12.6 times the projected earnings of its members, above the average valuation of 10.7 in the past five years. All the 10 industry subgroups retreated, led by makers of industrial goods.

“We have been overweight for a couple of months when the market started to rally,” said Geoffrey Ng, who oversees $260 million as an investment adviser at Fortress Capital Asset Management Sdn. in Kuala Lumpur. “For now, it could be a time to take a breather.”

The Tadawul All Share Index declined 1.7 percent in Riyadh, for a third day of losses. Ibovespa futures expiring this week lost 0.3 percent. The Bloomberg Commodity Index slipped 0.2 percent, ending a four-day increase. Egypt’s EGX 30 Index slid 0.7 percent as CIB’s 1.6 percent drop contributed most to the decline.

Orion Corp., a South Korean food maker, tumbled 13 percent in Seoul after earnings missed estimates. The Kospi index fell 0.2 percent. Indonesia’s market was shut for a holiday.

Bonds & Currencies
Turkish bonds dropped, with the yield on 10-year sovereign debt increasing 11 basis points to 9.74 percent. The rate on similar-maturity notes in China rose three basis points to 2.7 percent.

The premium investors demand to own emerging-market sovereign debt rather than U.S. Treasuries narrowed one basis point to 330, the lowest level since May 2015.

The MSCI Emerging Markets Currency Index lost 0.6 percent, paring its increase this month to 1.3 percent. The won weakened 1.5 percent, the most since June 24, while Malaysia’s ringgit and Brazil’s real lost at least 0.6 percent.

Source: Bloomberg Business News