Emerging Markets Head for Weekly Decline on Fed Rate Concern

LAGOS, Capital Markets in Africa: Emerging-market stocks were poised for the first weekly decline in more than a month and currencies dropped as caution prevailed among investors struggling to assess the outlook for higher U.S. interest rates.

Consumer stocks led declines among all 10 industry groups in the MSCI benchmark as the gauge dropped from a one-year high. The South African rand and South Korean won posted the biggest losses among currencies, weakening at least 0.9 percent. Turkish bonds and the lira slid ahead of a review by Fitch Ratings on Friday. Russian credit risk climbed and the ruble retreated amid a growing standoff with the government in Kiev. Ukrainian bonds headed for their worst week since May.

A rally in emerging markets that has sent stock valuations to a 15-month high is stuttering amid rising political risks in emerging Europe and the possibility of an interest-rate hike by the Federal Reserve this year. Hawkish comments this week from regional Fed chiefs and a dovish tone from minutes of the last policy meeting set the stage for Fed Chair Janet Yellen’s speech next week in Jackson Hole, Wyoming.

“Emerging markets are running out of steam after the gains we’ve seen in recent weeks,” said Anders Svendsen, an analyst at Nordea Bank A/S in Copenhagen, who sees value in the ruble after its underperfomance against oil. “We are seeing people taking some profits.”

The MSCI Emerging Markets Index fell 0.7 percent to 909.6 at 1:53 p.m. in London, wiping out all gains for the week. The MSCI Emerging Markets Currency Index declined 0.6 percent on Friday, leaving it down 0.5 percent for the week.

Russia Standoff
The ruble weakened 0.7 percent as Ukraine warned of a possible invasion by Russia, reigniting concern that geopolitical tensions will worsen. While the currency gained 1.2 percent this week, it lagged a 7.6 percent rally in Brent crude, its main export earner, that brought the commodity above $50 a barrel.

The cost of insuring Russian debt against default for five years climbed on Friday, extending an increase since President Vladimir Putin last week accused the government in Kiev of engaging in “terror” tactics in Crimea to 21.5 basis points. Yields on the government’s ruble bonds due in February 2027 climbed four basis points on Friday to 8.34 percent.

Yields on Ukraine’s restructured bonds maturing in September 2019 jumped 44 basis points this week to 8.51 percent, the biggest drop since May. The country’s currency, the hryvnia, headed for the weakest close in three months. President Petro Poroshenko warned on Thursday of a possible invasion by Russia.

Stocks
The emerging-market equity gauge is up 15 percent this year and trades at11.5 times its 12-month projected earnings, near the highest level since May 2015. For the first time in two weeks the measure’s 14-day relative strength index fell below 70, a level that some technical analysts say indicates the securities are overbought.

The Hang Seng China Enterprises Index of mainland companies traded in Hong Kong declined 0.5 percent, trimming a third week of advances. Equity gauges in Hungary and Poland and Turkey dropped at least 0.5 percent.

“Investors are taking cautious steps by cashing in some gains as Yellen might make some announcements at the Jackson Hole meeting,” said Jonathan Ravelas, chief market strategist at Manila-based BDO Unibank Inc. “We have seen a good run for sometime and the market is ripe for profit-taking.”

Currencies, Bonds
Turkey’s lira retreated for a second day, falling 0.3 percent., and yields on five-year government bonds climbed nine basis points to 9.59 percent, the highest level in almost two weeks. Fitch Ratings is scheduled to publish its first credit review of the country since a failed coup on July 15. The firm currently rates Turkey one level above junk, with a stable outlook.

Turkey’s “credit could trade somewhat cautiously today ahead of the decision,” analysts at BNP Paribas SA including Andrew MacFarlane said in an e-mailed note. “We expect the outlook to be revised to negative following the coup attempt.”

The rand slid 1.1 percent, leaving it down 0.4 percent this week. The won dropped 0.9 percent to the weakest level in more than two weeks. Mexican and Chilean currencies fell at least 0.6 percent. Brazil’s real was the only currency to gain, rising 0.5 percent.

The yield on China’s 10-year debt rose two basis points to 2.72 percent. Yields on similar-maturity South African debt climbed seven basis points to 8.47 percent, the biggest increase on a closing basis since July 18.

The premium investors demand to own emerging-market bonds rather than U.S. Treasuries narrowed four basis points to 331, according to JPMorgan Chase & Co. indexes.

Source: Bloomberg Business News