Emerging Markets Falter as Investors Assess Potential Fed Impact

(Bloomberg) -- Emerging-market stocks fell, reducing their second weekly gain in October, and currencies declined as investors gauged whether further gains in developing-nation assets are justified as the U.S. moves closer to raising borrowing costs.

The MSCI Emerging Markets Index dropped for the first time in four days after better-than-expected U.S. economic data supported the case for a December increase in Federal Reserve interest rates. South Korea’s won and South Africa’s rand depreciated along with bonds in both countries as the greenback completed a third weekly advance against a basket of currencies. Stock trading was canceled in Hong Kong as Typhoon Haima lashed the financial center.

The emerging-market equity benchmark has added 15 percent in 2016, set for the best year since 2012, as investors seek higher-yielding assets amid near-zero rates in developed countries. The “considerable interest-rate differential” will remain even after U.S. policy makers increase borrowing costs rise, said Wike Groenenberg, global head of emerging-market strategy at BNP Paribas SA.

“Markets are unnerved by the different signals they’ve been receiving,” said Groenenberg, who recommends buying the Brazilian real and real bonds. “The outlook for emerging markets remains reasonably solid for the weeks ahead. The Fed is well telegraphing the rate hike that is likely to come in December,” she said.

The Fed’s Beige Book economic survey released Friday pointed to a “mostly positive” outlook. A report Thursday showed existing U.S. home sales climbed at the fastest pace in six months in September, while a manufacturing gauge beat economists’ estimates. The odds that the Fed will increase interest rates this year has risen to 68 percent from 59 percent at the end of September, according to futures trading data.

MSCI’s developing-nation currency gauge slid 0.3 percent, cutting its five-day advance to 0.2 percent. The rand, won and Turkish lira each fell at least 0.2 percent.

China’s yuan fell to a six-year low, accelerating declines as policy makers signaled tolerance for further weakness amid the greenback’s strength and a tumble in exports.

The MSCI Emerging Markets Index fell 0.2 percent to 911.24. The equity gauge has gained 1.6 percent this week. Delta Electronics (Thailand) Pcl decreased 4.3 percent in Bangkok, after it was downgraded to “sell” by SCB Securities Co.

China Growth

Stocks rose this week after Chinese economic growth met estimates, boosting demand for riskier assets. China reported 6.7 percent expansion in the third quarter, the same as in the previous two periods. Federal Reserve Chair Janet Yellen on Oct. 14 signaled the U.S. central bank won’t move quickly to raise borrowing costs by outlining an argument for keeping monetary policy easy without taking an interest-rate hike off the table this year. 

The Philippine Stock Exchange Index shed 0.8 percent, paring gains of more than 3.5 percent during the week as President Rodrigo Duterte announced a strategic shift toward China away from the U.S.

The Ibovespa added 0.4 percent in a third consecutive weekly gain. Vale SA, the world’s largest iron-ore producer, was one of the biggest contributors to the Brazilian equity gauge’s advance, rallying more than 4 percent.

The yield on South African 10-year bonds rose four basis points to 8.83 percent, the biggest jump since Oct. 11. The rate on comparable South Korean debt jumped two basis points to 1.64 percent.

Debt markets were bolstered this week by Saudi Arabia’s record $17.5 billion Eurobond sale that received more than $60 billion in bids from potential buyers lured by coupons ranging from 2.375 percent to 4.5 percent, people familiar with the deal said.

--With assistance from Liau Y-Sing Nupur Acharya and Ian Sayson

To contact the reporters on this story: Jung Park in Seoul at jpark710@bloomberg.net, Natasha Doff in London at ndoff@bloomberg.net.

To contact the editors responsible for this story: Daliah Merzaban at dmerzaban@bloomberg.net, Douglas Lytle, Richard Richtmyer