Emerging markets volatile ahead of Fed

Picture: Simphiwe Mbokazi, Independent Media

Picture: Simphiwe Mbokazi, Independent Media

Published Sep 20, 2016

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Jakarta - Emerging-market stock volatility hovered near the highest level since June as traders awaited verdicts on monetary policy from the Federal Reserve and the Bank of Japan.

The MSCI Emerging Markets Index was little changed on Tuesday as markets and the Philippines gained at least 1 percent and measures in Russia and Thailand retreated. South Africa’s rand extended its longest winning streak since June while the ruble fell the most among emerging-market peers as oil traded below $46 a barrel. Hungarian bonds rallied for a third day since S&P Global Ratings reinstated the country’s investment-grade status and ahead of a policy meeting today.

Price swings in developing-nation equities have picked up in the past month as odds for the Fed to raise interest rates at its September meeting fluctuated from as low as 18 percent to as high as 42 percent. Investors who ploughed money into emerging-market exchange-traded bond and stock funds in the past 16 weeks are waiting to see what US and Japanese policy makers will decide on Wednesday to determine the sustainability of the rally.

Shifting sentiment around the Fed and BoJ decision “is the driver of volatility right now,” said Tony Hann, the head of equities at Blackfriars Asset Management in London. Blackfriars, whose Oriental Focus Fund has outperformed 95 percent of peers this year, hasn’t changed its positioning ahead of the Fed decision and doesn’t expect a change in US rates this year, Hann said.

The JPMorgan Emerging Market Volatility Index has climbed from a one-year low in July as uncertainty about the outlook for US borrowing costs has increased. The Bank of Japan has also been studying the effectiveness of its stimulus programs and economists are split about the likelihood of further easing tomorrow.

Stocks

The MSCI Emerging-Market Index was little changed at 897.29 by 12:10 p.m. in London. The gauge has gained 13 percent this year, trading at 12.42 times estimated 12-months earnings, as a global low interest-rates environment has boosted flows to emerging markets.

Seven of 11 industry groups in the gauge declined, led by energy companies including South African oil and gas producer Sasol. Brent crude slid 0.7 percent to $45.63 in London on speculation a global glut will be sustained amid rising supply from Nigeria to the US Hanssem rose to a four-week high as KTB Securities forecast the manufacturer of kitchen furniture will report improved third-quarter profit.

Shares in Dubai lost 1.1 percent, while Russian stocks slid 0.7 percent. Novatek OJSC headed for its biggest drop in almost three months in Moscow after Kommersant newspaper reported Russia is considering increasing its gas extraction tax rate.

Currencies

The MSCI Emerging Markets Currency Index was also little changed after rising 0.4 percent on Monday.

The rand gained 0.8 percent, heading for its longest winning streak since June. The South African currency has appreciated 5.8 percent this month after it weakened 6.1 percent versus the dollar in August as the market bets the Fed won’t raise interest rates and concern about Finance Minister Pravin Gordhan’s future have eased, Rabobank London-based strategist Piotr Matys wrote in e-mailed comments.

Russia’s ruble lost 0.4 percent as the price of oil, its key export-revenue earner, declined. Most Asian currencies and the Turkish lira were little changed against the dollar.

The Hungarian forint added 0.1 percent versus the euro. While Hungary’s central bank will keep its benchmark three-month deposit rate unchanged at a monthly policy meeting today, it will probably impose a cap on access to deposits at Tuesday’s meeting, according to economists surveyed by Bloomberg.

Bonds

The premium investors demand to own emerging-market debt over US Treasuries narrowed one basis point to 342, according to JPMorgan indexes.

Hungarian forint bonds due in October 2027 rose, cutting the yield by five basis points to 2.75 percent. Similar-maturity South African notes also gained, lowering the yield two basis points to 8.58 percent.

The probability that South Africa’s sovereign credit rating could be cut in November by Moody’s Investors Service is about a third, the company’s Vice President Zuzana Brixiova told reporters in Johannesburg on Tuesday.

-With assistance from Liau Y-Sing.

BLOOMBERG

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