Emerging stocks edge up to three-week high

Emerging-market stocks climbed to a three-week high as Chinese equities rallied amid speculation MSCI Inc. will include yuan-denominated shares in its global benchmark indexes in June. A gauge of developing-nation currencies climbed, paring its first monthly loss since January.

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, extending monthly losses. The premium investors demand to own emerging-market debt over U.S. Treasuries narrowed.

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 30 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 Fund futures. 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 reopen Tuesday after being shut yesterday for Memorial Day.

The MSCI Emerging Markets Index of shares rose 0.3 percent as of 2:15 p.m. in London, set for its highest close since May 5. The gauge has fallen 3.6 percent in May. The MSCI Emerging Markets Currency Index 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.
Stocks

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.

Equity gauges in South Korea and Saudi Arabia climbed more than 0.8 percent, while stocks in Poland, Hungary, Turkey and Russia retreated.

Currencies

The ruble dropped 0.4 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 9.8 percent this month, its 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 0.6 percent on Tuesday and 4.4 percent for the month.

Bonds

The premium investors demand to own emerging-market debt over U.S. Treasuries narrowed four basis points to 390, according to JPMorgan Chase & Co. indexes.
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 43 basis points, the most this year.

Hungarian bonds fell for a third day, pushing the yield on 10-year government debt up 4 basis points to 3.46 percent, the highest level since May 19.

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