Agony for Wall St. economists, investors as Fed meets

17 Sep 2015 | Author: | No comments yet »

Emerging Stocks Rise With Currencies Before Fed as China Rallies.

Emerging-markets currencies strengthened against the dollar Wednesday as investors closed out short positions ahead of a decision from Federal Reserve policy makers on whether or not to raise interest rates.The World Bank warned on Tuesday that monetary policy tightening by the US Federal Reserve could spur a “perfect storm” of threats to growth and financial stability in developing economies.Emerging-market assets jumped, with the benchmark equities index rising to the highest level this month and currencies headed for the longest rally since early 2014 as investors awaited the Federal Reserve’s decision on U.S. interest rates.

Regardless of whether the Fed begins raising interest rates at this week’s meeting or later, World Bank economists said in a report that the shift in policy could pose huge challenges to so-called emerging and frontier economies (EFEs) that are particularly vulnerable. It would come as both global economic growth and trade have turned down and sinking commodity prices have particularly hurt a number of developing economies, the report said, and economic growth among EFEs is already the lowest since the financial crisis.

Many have trade and budget shortfalls, and their governments and companies have high levels of US dollar debt that make them particularly vulnerable to tighter conditions in global markets and a stronger US dollar. The Russian ruble was the day’s best performer, rising 2.4% to trade at 65.25 rubles to the dollar, its highest level in two weeks, as crude oil prices rose.

The Fed’s initial hike, expected to be just 0.25 percentage points, would be the first in more than nine years and come after the US central bank held the benchmark federal funds rate at an extraordinary between 0 percent and 0.25 percent since the 2008 crisis. However, it would likely begin a series of increases as the Fed seeks to get rates back to more “normal” levels at about 3 percent over the next couple years. It added that if a real strengthening of the US economy underpins the rate increases, that is likely good for the rest of the world. “Since the tightening cycle has been widely anticipated and will take place gradually in the context of a robust US economy, it is expected to have a benign impact on capital inflows to EFEs,” it said.

So if the Chinese market rises, investors are willing to believe that this can offset some of the Fed risk.” All 10 industry groups in the MSCI Emerging Markets Index advanced, led by a gauge of technology companies, which jumped 2.6 percent. These currencies have been battered by U.S. rate-hike expectations, as higher interest rates in the U.S. would make assets denominated in emerging-markets currencies less attractive by comparison. The Shanghai Composite jumped the most since Aug. 27, with gains coming in the final hour of trading in a pattern that’s become associated with state support. The company’s President Cheng Boming has been swept up in a widening campaign to root out financial wrongdoing and assign blame for the nation’s $5 trillion stock rout. Crude prices have rebounded 17 percent from a six-year low reached on Aug. 24 as signs of reducing U.S. supplies cushioned the shock from the slowdown in China’s economy.

The premium investors demand to own emerging-market debt over Treasuries narrowed one basis point to 381 basis points, according to JPMorgan Chase & Co. indexes.

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