The Federal Reserve’s surprise decision to refrain from scaling back monetary stimulus provided a respite to investors in emerging markets, where currencies are in the midst of their worst rout in two years.
“It gives everyone some breathing time,” Denise Simon, an emerging-market fixed income manager at Lazard Asset Management, which oversees $147 billion, said by phone from New York. “It certainly takes some of the immediate pressure off the more vulnerable countries. Emerging markets will continue to correct on the upside as the result.”
The Brazilian real and Turkish lira jumped more than 2% and JPMorgan Chase & Co.’s index for dollar-denominated bonds in developing nations posted the biggest rally in almost three months yesterday, after the Fed said it will keep buying $85 billion of debt a month. Companies and governments in Colombia, Chile, Turkey, Brazil and Mexico announced plans for overseas bond sales a day after the Fed kept its stimulus program intact, driving down yields on emerging-market debt.
Fed Chairman Ben S. Bernanke held back from paring monetary stimulus to support economic growth, soothing investors who had dumped emerging-market assets since May as higher U.S. interest rates sparked capital flight. A group of the 20 most traded emerging-market currencies lost 7.4% between May and August, the most in two years.
The decision came at a time when economic data from China to Brazil are showing signs of improvement and helps countries most dependent on foreign financing such as Brazil and India, Simon said.
The Indonesian rupiah led gains in Asian currencies today and Indonesia’s Jakarta Composite Index advanced the most in almost two years.
The rupee strengthened 2.6% against the dollar at 9:22 a.m. in London and Thailand’s baht appreciated 1.1%. The Malaysian ringgit increased 2.7%. The Jakarta Composite Index jumped 4.7% and India’s S&P BSE Sensex Index added 3.4%.
The real led the rally in developing-nation currencies yesterday, gaining 3.2% to 2.1860 per dollar and up 9.1% in September, poised for the biggest monthly advance since October 2011.
Brazil’s Ibovespa climbed 2.6%, extending its gain from a four-year low reached in July to more than 20%. JPMorgan’s bond index advanced 1%, bringing its rally this month to 3%.
Colombia hired Deutsche Bank AG and HSBC Holdings Plc to sell overseas dollar securities due in 2024, according to a regulatory filing. The country may sell the bonds today to yield about 1.65 percentage points more than U.S. Treasuries, according to a person familiar with the offering who asked not to be identified because the terms aren’t set. The benchmark offering will be at least $500 million, the person said.
Brazil’s development bank, BNDES, plans to sell benchmark dollar bonds due in three and 10 years, a person said. Petroleos Mexicanos, Mexico’s state-owned oil company, is issuing peso- denominated debt due in 2024, another person said.
Garanti Bankasi AS, Turkey’s largest bank by market value, may boost the size of a bond sale by 38% to 900 million liras ($461 million). Turkey’s Treasury will hold investor meetings starting Sept. 23 for a possible sale of Islamic bonds. Armenia hired banks for a seven-year dollar bond sale, Chile’s Embotelladora Andina SA plans to meet with investors next week while the Eurasian Development Bank is also poised to sell, according to people familiar with the offerings, who asked not to be identified because the information is private.
The yield on the benchmark U.S. 10-year note fell 16 basis points, or 0.16 percentage point, to 2.69% yesterday, making higher yielding emerging market assets more attractive.
“This has created a much better environment for risky assets,” Paul Denoon, who oversees $25 billion as the head of emerging-market debt at AllianceBernstein Holding LP, said in a phone interview from New York. “It’s important because one of the concerns for the market is the large external financing needs for developing countries. This creates stability.”
Strategists at Citigroup Inc. yesterday advised clients to buy the Mexican peso and bet 10-year interest-rate swaps will fall, saying the Fed’s decision boosts investor risk appetite.
Brazilian state development bank president Luciano Coutinho said he expects currency volatility to increase because the Fed didn’t start tapering.
“For us, the sooner it starts and ends, the better,” Coutinho said in an interview at Bloomberg’s headquarters in New York yesterday. “I would rather see it start today and have some date to finish because then we will feel the whole impact. The worst thing is the uncertainty.”
Bernanke first signaled on May 22 that policy makers could reduce the bond purchases, triggering capital outflows and a selloff in emerging markets. More than $50 billion has left global funds investing in emerging-market bonds and stocks since May, extending the outflow this year to $11 billion, according to data from EPFR Global.
The rand, real, rupee, rupiah and lira, dubbed the “fragile five” by Morgan Stanley strategists because of their countries’ reliance on foreign capital for financing needs, dropped as much as 18% in the four months through August.
The selloff reversed this month as economic data from China to Brazil improved. China’s exports jumped 7.2% in August from a year earlier, beating estimates, the nation’s customs service said Sept. 8. Brazil’s July retail sales rose almost 10 times faster than economists predicted, as consumers spent more on food, clothing and appliances.
“People trashed emerging markets,” Pablo Cisilino, a money manager at Stone Harbor Investment Partners LP, which has about $55 billion in emerging-market debt, said in a phone interview from New York yesterday. “People were too optimistic about developed market growth and too pessimistic about emerging markets. They are revising that now. There’s more room to go.”
The market stability encouraged developing-country borrowers to come back to the international debt market to raise funds. Companies including America Movil SAB, the biggest Latin American mobile-phone company, and Ecopetrol SA, Colombia’s state-owned oil producer, raised $16.8 billion in bond sales this month, compared with $7.5 billion in August, according to data compiled by Bloomberg.
Brazil’s central bank announced a $60 billion intervention program of currency swaps and foreign-exchange credit lines through the end of the year in a bid to support the real. Reserve Bank of India Governor Raghuram Rajan, who took office this month, unveiled a package of measures that Barclays Plc estimated may lure $10 billion in capital inflows.
The Fed’s decision yesterday has given the countries some time to build up their defenses and rebalance their economies, said Lazard’s Simon.
“It does not solve all the issues in emerging markets,” said Simon. “But with the rates staying low and dollar weakness, that’s a positive for emerging-market assets.”