Market Watch | Emerging Currencies Gain as Rousseff Ouster Spurs Brazil Stocks

LAGOS, Nigeria, Capital Markets in Africa: Emerging-market currencies and energy shares rose as oil traded above $48 a barrel, bolstering the outlook for commodity exporters. Brazilian equities rallied after President Dilma Rousseff was suspended from office.

The Ibovespa headed for its highest level in more than a week. Currencies in Colombia, Mexico and Russia appreciated at least 0.6 percent as a drop in U.S. crude stockpiles and supply outages from Canada to Nigeria supported oil. Wagers for a devaluation of the naira rose the most on record after the vice president said a “substantial review” of foreign-exchange policy was under way.

Oil’s more than 70 percent rebound from a 12-year low in January has driven a rally in emerging markets, where countries from South Africa to Russia rely on commodity exports for their budget revenue. The best performing currency and equity markets since then are in Brazil, where months of political turmoil culminated in the nation’s Senate voting to suspend Rousseff from office on Thursday.

“For the market it’s giving some hope that whoever comes next can give a positive push to the economy,” said Regis Chatellier, a strategist at Societe Generale SA in London, who said most of the positive momentum leading up to Rousseff’s ouster has already been factored into Brazilian assets. “My sense is that the selloff we have seen since early May was more a pause in the rally rather than a shift in sentiment,” he said of the broader performance in developing countries.

‘Positive Impetus’ 
Brazil’s real, which has appreciated 10 percent in 2016, weakened 0.7 percent. The premium investors demand to own Brazilian bonds over U.S. Treasuries narrowed six basis points to 389, according to JPMorgan Chase & Co. indexes. The Brazilian benchmark rose 1.2 percent, extending this year’s gains to 23 percent.

Legislators agreed on Thursday after a marathon session that lasted 21 hours to try the president on allegations she illegally doctored fiscal accounts to mask the size of the budget deficit. The vote was 55 to 22. She will now face an impeachment trial in the Senate.

The scale of support from Senate “was not priced in by the market and will deliver a further positive impetus for Brazilian assets,” Abbas Ameli-Renani, a global emerging markets strategist at Amundi in London, said in a research note.

Currencies 
The MSCI Emerging Markets Currency Index rose 0.1 percent on Thursday, trimming losses in May to 1.4 percent. Russia’s ruble, the second-best performer in the developing world this year after the real, strengthened 0.4 percent to 64.7440 per dollar. The Colombian peso added 0.9 percent in its second day of gains.

Developing-nation currencies are “less undervalued” after rallying in the previous three months, Kamakshya Trivedi, Goldman Sachs Group Inc.’s London-based strategist, said in a report. The U.S. lender prefers high-yielding currencies like the Russian ruble, Indian rupee, and is more neutral on Indonesia’s rupiah and Brazilian real as the macro backdrop may be less supportive in the months ahead, he wrote.

“While levels are clearly less compelling than in late January, the broad message — that the combination of valuation and yield in emerging-market exchange rates looks attractive for the first time in several years — remains intact,” Trivedi wrote.

Naira three-month non-deliverable forwards weakened 8.7 percent to 234.5 against the dollar, the biggest move since the contracts started trading in March 2011. That’s betting on an 18 percent devaluation in the period. Changes to the currency regime “may feature” a devaluation, Vice President Yemi Osinbajo said in a speech in Lagos, the commercial capital, on Wednesday.

Stocks 
A gauge of energy stocks was the biggest gainer among 10 industry groups in the the MSCI Emerging Markets Index, climbing 1.2 percent to the highest in more than a week. Technology companies fell the most, dropping 0.5 percent.

Chinese shares in Hong Kong dropped to their lowest levels in two months. The Philippine Stock Exchange Index fell 1 percent, following a 5.8 percent jump over Tuesday and Wednesday.

Shares in Brazil and the Czech Republic increased at least 1.1 percent, leading gains in emerging markets along with Brazil, while banking shares climbed in India amid growing optimism over the progress of economic bills in parliament, including one to overhaul archaic insolvency laws.

Bonds
Russian bonds rallied, pushing yields to the lowest level since before international sanctions were imposed on some companies and individuals. The rate on 10-year government debt fell three basis points to 8.85 percent.

Bonds in Turkey also advanced for a second day following the longest rout in a year. The yield on 10-year debt fell seven basis points to 9.90 percent, a sign that concern is easing over a power struggle that prompted Prime Minister Ahmet Davutoglu to say last week he will resign.

The yield gap over Treasuries for emerging-market debt narrowed four basis points to 394, according to JPMorgan indexes.

Source: Bloomberg