Oil loses hold on emerging markets as bonds, currencies flee

Bloomberg

It’s not just emerging-market stocks that have shed their umbi-
lical link to oil and commodities. Bonds and currencies are also breaking free.
Stocks in the developing world posted the best start to a year since 2009 even as oil capped its worst first half in 19 years. That’s partly because the weight of energy companies in the benchmark index has steadily declined, while technology companies became the dominant industry group.
But now, even assets joined at the hip with oil and commodities are heading for a split. Emerging-market currencies and local-currency bonds, which had retained their positive correlation with those raw materials for most of the last three years, are now moving in the opposite direction.
The correlation between the Bloomberg Emerging-Market Local Sovereign Index and Brent crude reached minus 0.37, the most negative since October 2013. The relationship between the MSCI Emerging Markets Currency Index and the Bloomberg Commodity Index has slumped to minus 0.18, the lowest since January 2014.
That may not be good news for emerging markets: assets that rallied in the first half as oil dropped may fall in the second half as crude rebounds. Citigroup Inc. expects West Texas Intermediate crude to bounce back to $50-$60 a barrel and oil inventories to fall by about one million barrels per day.
Oil’s gains since late June mark the start of a “sustainable rally,” Ed Morse, Citigroup’s head of commodities research, said in a report. Brent crude has climbed 9.2 percent since June 21, including an eight-day winning streak, the longest in more than five years. It fell 1.4 percent today. Meanwhile, signs are growing that investors are tiring of the rally in developing-nation assets.