Market Watch: Emerging Stocks Rise as China Rallies on MSCI Index Speculation

LAGOS, Nigeria, Capital Markets in Africa: Emerging-market stocks rose to a three-week high as Chinese equities rallied amid speculation MSCI Inc. will include yuan-denominated shares in its global benchmarks and concern eased that higher U.S. interest rates will squelch global economic growth.

The Shanghai Composite Index surged 3.3 percent, the most since March. South African stocks headed toward a fourth month of gains as a slump in the rand in May boosted the outlook for companies with revenue in foreign currencies such as Naspers Ltd. Russia’s ruble and the Brazilian real retreated the most among developing-nation currencies.

Emerging-market shares are showing signs of recovering from a slump earlier in May as concern eases that an increase in U.S. rates as soon as June will undermine global growth. Reports this week may prove crucial in determining whether the Federal Reserve will act as soon as its June meeting with an inflation gauge due Tuesday and May payrolls data out on Friday.

“The market feels more comfortable with prospects of upcoming Fed rate hikes,” said Michael Wang, a strategist at hedge fund Amiya Capital LLP in London, whose recommendations are currently under review. “I expect the dollar to strengthen, so to that extent I think emerging-markets are still vulnerable.”

There’s a 22 percent chance the U.S. central bank will raise rates at its June 14-15 review, according to data compiled by Bloomberg, based on Fed futures trading. The odds have increased from as low as 4 percent on May 16. Fed Chair Janet Yellen said last week improvement in the U.S. economy would warrant another rate increase in coming months. U.S. financial markets reopenTuesday after being shut yesterday for Memorial Day.

Chinese shares rallied after Goldman Sachs Group Inc. said the probability they will win MSCI inclusion has increased to 70 percent from 50 percent just last month thanks to new rules aimed at curbing trading halts and a clarification by the regulator about beneficial ownership rules.

The MSCI Emerging Markets Index increased 0.1 percent to 808.65 at 11:37 a.m. in New York, set for its highest close since May 5. The gauge has fallen 3.7 percent in May. A gauge of developing-nation currencies climbed 0.1 percent on Tuesday and has dropped 2.9 percent this month.

Investors withdrew more than $200 million from exchange-traded funds that invest in emerging markets last week, bringing this month’s losses to $5 billion. Outflows from emerging-market ETFs that invest across developing nations as well as those that target specific countries totaled $202.2 million, compared with $1.91 billion in the previous period, according to data compiled by Bloomberg.

The FTSE/JSE Africa All Share Index retreated 1 percent, paring gains this month to 1.8 percent. The index is poised to advance for a fourth month, the longest stretch of gains since July 2014. So-called rand-hedge stocks such as Naspers and SABMiller Plc, which make most of their revenue in foreign currencies, collectively make up 32 percent of the index.

The ruble dropped 0.5 percent, extending a decline in May to 2.1 percent. While the currency of the world’s biggest energy exporter has rallied the most in the world this year, its strength may prove unsustainable without further gains in crude, the central bank’s research and forecasting department said in a report published on Monday.

South Africa’s rand has declined 9.6 percent in May, the biggest monthly retreat since May 2013. S&P is due to announce the results of its credit-rating review on the country on Friday, with four out of 13 analysts surveyed by Bloomberg expecting a cut to below investment grade.

Brazil’s real was down 1.1 percent on Tuesday and 4.8 percent for the month.

Russian five-year government bonds fell, lifting the yield one basis point to a one-month high of 9.23 percent. The rate on 10-year South African bonds retreated seven basis points, paring a jump this month to 42 basis points, the most this year.

The premium investors demand to own emerging-market debt over U.S. Treasuries was unchanged at 395 basis points, according to JPMorgan Chase & Co. indexes.

Source: Bloomberg Business News

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