Emerging Markets Halt Brexit Slump on Wagers for Fed Status Quo

LAGOS, Nigeria, Capital Markets in Africa: Developing-nation stocks and currencies rebounded from a four-day slide as MSCI Inc.’s decision not to include Chinese mainland shares in its indexes buoyed smaller markets and investors wagered the Federal Reserve would adopt dovish language in its Wednesday statement.

Equity benchmarks in Hungary, Romania, India and the Czech Republic advanced at least 1 percent each. Chinese stocks traded in Hong Kong also rose as the index provider’s decision late Tuesday meant there won’t be a rush to shift funds from other markets into Shanghai. South Africa’s rand and Russia’s ruble led peers higher. The premium investors demand to own developing-nation sovereign debt rather than U.S. Treasuries narrowed for the first time in five days.

The Fed meeting, which triggered volatility across emerging markets in early June, was pushed to the background this week as poll after poll suggested the probability of Britain’s exit from the European Union is rising. Stocks and currencies posted their biggest four-day losses since January as the risks of Brexit to global trade and growth outlook outweighed optimism U.S. policy makers will delay increasing interest rates.

“The main focus is the June 23 Brexit referendum as nobody expects a major surprise from the Fed today,” said Simon Quijano-Evans, chief emerging-market strategist at Commerzbank AG in London. “We have seen a lot of profit-taking in the past few days, and one cannot take today’s rebound as an indicator of sentiment. People will watch the Fed comments and look to connect the dots but, until the referendum, we are likely to see low-liquidity, low-volume markets.”

Stocks
The MSCI Emerging Markets Index rose 0.6 percent to 807.57 at 1:20 p.m. in London, ending a four-day decline of 4.7 percent. A gauge of technology companies led gains, trading near the highest valuation in more than six years.

The broader measure trades at 11.6 times the projected earnings of its members, about 26 percent below the valuation for developed-nation stocks. That’s just below the average discount of 28 percent in the last one year.

China’s mainland stocks reversed an earlier loss to jump the most in two weeks, spurring speculation state-backed funds may be supporting the market after the MSCI decision. The Shanghai Composite Index is still down 18 percent for the year. The Hang Seng China Enterprises Index added 0.3 percent in Hong Kong. China’s domestic equities were denied entry into MSCI benchmarks for a third time, with the index compiler saying policy makers need to make additional improvements to the accessibility of the A-share market.

“The decision by MSCI not to include Chinese A-shares was a blessing for other Asian markets as it would have shifted investors’ portfolios,” saidJeffrosenberg Tan, an associate director at PT Sinarmas Securities in Jakarta.

Indian stocks climbed for the first time in five days as a selloff in Asia eased and investors speculated that foreign buying of the nation’s shares will now accelerate. Hungary’s BUX Index and the Czech Republic’s PX Index headed for the biggest gains in two and three weeks, respectively.

In Nigeria, stocks gained 1.1 percent, the first advance in four days, and naira forward contracts surged to a record as traders anticipated the central bank Governor will announce on Wednesday a devaluation of the currency as part of a new foreign-exchange policy.

Pakistan’s Karachi Stock Exchange KSE100 Index jumped 2.8 percent to a record after the nation’s equities were upgraded to emerging-market status. Asia’s best-performing share market of 2016 may attract about $220 million ofinflows, JPMorgan Chase & Co. said in a note. Other estimates project inflows of as much as $475 million by mid-2017.

Egypt’s bucked the global trend and declined 2.1 percent, heading for the biggest drop in more than a month.

Currencies
The MSCI Emerging Markets Currency Index climbed 0.2 percent, ending a 1.4 percent slide during the previous four days. 

The ruble gained 0.7 percent, the most among 24 emerging-market currencies tracked by Bloomberg, while the peso added 0.3 percent. South Africa’s rand strengthened 0.4 percent, its second advance in three days.

A gauge of expected swings in India’s rupee capped its biggest two-day jump since August amid signs demand for local assets is waning as anxiety about global central bank meetings and a potential British exit from the European Union grips investors. Outflows for June climbed to 20.7 billion rupees ($308 million), data compiled by Bloomberg show. The currency rose two percent after four days of losses.

Bonds

The yield on Poland’s 10-year government notes fell four basis points to 3.27 percent, while the rate on South Africa’s benchmark 2026 bond dropped five basis points to 9.14 percent.

The premium for emerging-market sovereign debt narrowed two basis points to 405 basis points, according to JPMorgan Chase & Co. indexes.

Source: Bloomberg Business News