Bloomberg News

Emerging Stocks Drop to 14-Month Low as Fed Sees Economic Risk

September 21, 2011

Sept. 21 (Bloomberg) -- Emerging-market stocks fell to a 14-month low after the Federal Reserve said there are “downside risks” to the economic outlook and planned to replace much of the short-term debt in their portfolio with longer-term Treasuries.

The MSCI Emerging Markets Index slipped 1.2 percent to 940.02 at 5:06 p.m. New York time, the lowest closing level since July 2010. Equities benchmarks in Brazil, Mexico, Chile, and Argentina declined. Russia’s Micex Index retreated 0.8 percent. Indonesia’s Jakarta Composite index slid for a third day as the nation’s domestic vehicle sales slowed in August. Hungary’s BUX index declined 1.3 percent.

The U.S. central bank will buy $400 billion of bonds with maturities of six to 30 years while selling an equal amount of debt maturing in three years or less, the Federal Open Market Committee said today in Washington after a two-day meeting. “There are significant downside risks to the economic outlook, including strains in global financial markets,” the Fed statement said.

The Fed’s “continued negative outlook on the economy and they basically don’t see any hope -- that worries me the most,” said Keith Springer, the president of Springer Financial Advisors in Sacramento, California, by phone. The stocks were sent down as “some people were looking for a full-blown monetary easing program. They didn’t quite get it.”

Today’s move, dubbed “Operation Twist” by economists after a similar Fed action in 1961, may lower interest rates and avoids reprising the money creation that sparked Republican criticism last year. Seventy-one percent of economists surveyed by Bloomberg forecast such as move, even as 61 percent said it will probably fail to lower the U.S.’s 9.1 percent unemployment rate.

Emerging vs. Developed

The MSCI emerging market stock index has slid 18 percent this year, compared with an 11 percent decline in the MSCI World Index. Stocks in the emerging-market gauge are traded at 10.4 times trailing earnings, versus 12.3 for equities in developed nations.

OHL Mexico SAB, the toll road and airport builder and operator, fell 5.2 percent in Mexico City.

Cosan SA Industria & Comercio, which shares control of the world’s largest sugar-cane processor with Royal Dutch Shell Plc., dropped 2 percent.

The European debt crisis has generated as much as 300 billion euros ($407 billion) in credit risk for European banks, the International Monetary Fund said, calling for capital injections to reassure investors and support lending.

OAO Gazprom, the world’s biggest natural-gas exporter, slid 1.3 percent in Moscow. OAO Novatek, the country’s second-largest gas producer, fell 2.3 percent.

Currencies Weaken

All but two of the 25 emerging-market currencies fell against the dollar, led by South Africa’s rand. The rand depreciated 6.2 percent.

Brazil’s real tumbled 4.8 percent to a 15-month low, extending its decline this month to 15 percent. The Mexican peso dropped 3.5 percent.

Indonesia’s Jakarta Composite index retreated 1.5 percent. PT Astra International, Indonesia’s biggest automotive retailer, dropped 2.1 percent. The nation’s domestic vehicle sales declined to 73,279 units in August from 89,056 units the previous month, Astra said.

OTP Bank Nyrt., Hungary’s biggest lender, plunged 6.8 percent.

China Gains

The Shanghai Composite Index jumped 2.7 percent after the Conference Board said its leading indicator index, which is designed to capture prospects over the coming six months, rose 0.6 percent in July.

The Conference Board revised June’s index to a 0.9 percent gain from a previous 1 percent increase. The index “signals a continuation of economic expansion through the end of this year,” Jing Sima, the board’s New York-based economist, said in a statement.

The extra yield investors demand to own emerging-market debt over U.S. Treasuries surged 13 basis points, or 0.13 percentage point, to 418, according to JPMorgan Chase & Co.’s EMBI Global Index.

--With assistance from Tal Barak Harif in New York and Irene Shen in Shanghai. Editors: Alex Nicholson, Alan Purkiss

To contact the reporters on this story: Belinda Cao in New York at lcao4@bloomberg.net; Jason Webb in London at jwebb25@bloomberg.net.

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net.


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