Emerging markets took a breather, with stocks and currencies rebounding from their worst two-day drop since June, as traders pared bets that the Federal Reserve will raise interest rates next week.
MSCI’s gauge of developing-nation shares climbed from a five-week low after Fed Governor Lael Brainard said the case for tightening monetary policy is "less compelling", Bloomberg reported.
Nine of 10 industry groups advanced, led by information technology shares. Equity benchmarks in Thailand, South Korea and Hong Kong led the gains, while those in Malaysia, Indonesia and the Philippines fell as local markets opened after Monday’s holiday. The ringgit declined to its lowest level since June even as a measure of emerging currencies rose.
The market-implied odds of a Fed rate hike on Sept. 21 dropped to 22% from 30% at the end of last week after Brainard remained dovish in a speech Monday, even as she said the US economy is making gradual progress toward achieving the central bank’s goals.
Chinese data supported Tuesday’s rebound, with Asia’s largest economy showing signs of stabilizing after industrial production, retail sales and investment in August exceeded forecasts.
Indexes, Currencies
“While the latest remarks from the Fed gave some optimism to emerging-market investors, the risk for an interest rate increase this year remains, and the market will remain volatile and react to the news from central banks,” said Andy Ferdinand, head of equity research at PT Samuel Sekuritas Indonesia in Jakarta. “Data from China was positive, but people would have to really look at it whether it was a solid uptrend or just a positive tick on the downtrend.”
The MSCI Emerging Markets Index rose 0.6% to 894.43 in Hong Kong, following a 4.1% drop over the previous two sessions. The gauge has risen 13% this year and trades at 12.3 times the 12-month projected earnings of its constituents. That compares with 3.2% gain in the MSCI World Index, which has a multiple of 16.1.
Thailand’s SET Index surged 2%, the most since Feb. 19, while the Hang Seng China Enterprises Index of mainland shares traded in Hong Kong advanced 0.5%. South Korea’s Kospi also rose 0.5%. Samsung Electronics Co. rallied 6.6% in Seoul, rebounding from its biggest two-day slump since 2008 on concerns over the recall of its Galaxy Note 7 mobile phone.
Benchmarks in Indonesia, the Philippines and Malaysia dropped at least 0.6% each.
The ringgit slumped 1%, its biggest drop since June 24, as a decline in oil prices and a controversy involving a troubled state fund damped demand for Malaysia’s assets. The Philippine peso and Indonesian rupiah fell at least 0.4% each, while Thailand’s baht and Taiwan’s dollar rose 0.2%. South Korea’s won fell 0.2%, after rising as much as 0.6% earlier.
The MSCI Emerging Markets Currency Index was up 0.2% after sliding 1.3% over the previous two days.
Fed Divided But Stands Pat
Federal Reserve officials, lacking a strong consensus for action a week before their next policy meeting, are leaning toward waiting until late in the year before raising short-term interest rates, Dow Jones reported.
It is a close call. But with inflation holding below the Fed's 2% target and the unemployment rate little changed in recent months, senior officials feel little sense of urgency about moving and an inclination toward delay, according to their public comments and recent interviews.
The Fed's decision has become the subject of intense market speculation in recent days. Interest rates can affect stock valuations, the cost of financing a home and whether companies will take on big new projects, making the central bank the perpetual center of market attention. Wall Street is especially attuned to when the Fed will move after it has decided to hold rates steady so far this year.