Emerging-market stocks and currencies rose as traders bet the Federal Reserve will hold off on raising U.S. interest rates this week, shoring up demand for riskier assets, which have tumbled amid signs that China’s economic slowdown is worsening.
The MSCI Emerging Markets Index rose 0.6 percent to 807.66, building on the biggest weekly rally since April. Traders put the odds for a Fed rate increase at the Sept. 16-17 meeting at 26 percent, compared with 38 percent on Aug. 31. The prospect for higher U.S. borrowing costs and China’s shock currency devaluation last month led investors to flee riskier assets, pushing forward price-to-earnings ratios for emerging-nation stocks down to 10.7, a 29 percent discount to equities in developed countries.
While data showing a slowdown in Chinese industrial output sent the Shanghai Composite Index to its steepest loss in three weeks on Monday, Malaysian shares jumped the most in two years as the government said it will tap a fund to support the equities. Banking shares in Istanbul dropped for a fourth day as Citigroup Inc. downgraded some lenders to sell, saying the weaker currency was eroding their capital buffers. The lira declined 0.4 percent to a record 3.0593 per dollar.
“The market is not positioned for the Fed to raise rates,” said Aurelija Augulyte, a senior strategist at Nordea Bank AB in Copenhagen, who favors commodity currencies like the Brazilian real and South African rand after they “overshot” their fair values. “The Fed is not in a rush and even if they do hike, which they might, they will talk down the rate path, and maintain the gradualist tone, which should be emerging-market positive.”
A gauge tracking 20 emerging-market currencies advanced 0.2 percent, rising for a fifth day, while the premium investors demand to own developing-nation debt over U.S. Treasuries was unchanged at 393 basis points, according to JPMorgan Chase & Co. Indexes. Traders current prediction that there’s a 26 percent chance that the Fed will raise borrowing costs at its Sept. 16-17 meeting is down from more than 50 percent before China’s currency devaluation roiled financial markets and raised concern about global growth, data compiled by Bloomberg show.
The Brazilian real strengthened 1.5 percent against the dollar, ending a two-day slump, amid speculation the government is planning cuts as officials look to shore up the budget and avoid another sovereign credit-rating downgrade. The country’s Ibovespa equity gauge increased 1.9 percent, led by a 4 percent gain in lender Itau Unibanco Holding SA.
All 10 industry groups in the MSCI Emerging Markets Index rose. State-controlled enterprises steered the 2.3 percent rally in Kuala Lumpur after Prime Minister Najib Razak said the government will “reactivate” ValueCap Sdn. with funds of as much as 20 billion ringgit ($4.6 billion). Tenaga Nasional Bhd., a government-controlled power utility, jumped 6.6 percent, the most since December 2013.
The Philippine Stock Exchange Index advanced 2.3 percent, led by a 6.2 percent gain in SM Investments Corp. Indian shares rose 1 percent after factory output and inflation data signaled an improving outlook for Asia’s third-biggest economy. The FTSE/JSE Africa All Share Index climbed 0.9 percent. Russia’s Micex Index added 0.5 percent.
Data out of China showed that risks remain to developing countries, particularly those that rely heavily on the world’s second-largest economy for their exports. The Shanghai Composite Index fell 2.7 percent after industrial output rose 6.1 percent in August from a year earlier, missing the 6.5 percent estimate. Investment in the first eight months also increased at the slowest pace since 2000.