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Emerging stocks, currencies diverge as markets price U.S. Fed easing

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The benchmark indexes for emerging-market equities and currencies, respectively, moved in opposite directions Monday, deepening a trend that emerged last week, when their short-term correlation was interrupted for the first time in 21 years.

Srinivasan Sivabalan and Colleen Goko --

Last week’s unwinding of the yen carry trade led to a weaker dollar index, “but an overall weakening eqiuty market selloff,” said Rajat Agarwal, Asia equity strategist at Societe Generale SA. “Now, we are starting to see some strength in the dollar coming back but stock markets are stabilizing faster given the sharp selloff.” He said he expected the traditional correlation to return “when re revert to more normal market conditions.

But the bigger markets action in China was in 10-year yuan bonds, with the benchmark yield heading for the biggest increase since February. The securities had extended recent declines as the central bank warned about potential risks arising from the relentless rally in debt markets.

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