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Treasuries gain with emerging markets on Fed countdown, China

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(Bloomberg) — Treasuries rose with emerging markets as traders suggested the Federal Reserve will delay increasing interest rates this week after reports spurred concern that China’s slowdown will deepen.

Shares in developing nations rose for the first time in three days, while European equities reversed earlier gains with trading volume 17 percent less than the 30-day average. Copper declined for a second day on concern slowing growth in China will hurt demand and the Shanghai Composite Index slid the most since Aug. 25. 

Traders are predicting there’s a 30 percent chance that the Fed will raise borrowing costs for the first time since 2006 at its Sept. 16-17 meeting. Chinese stocks led declines in Asia after the country’s industrial output missed economists’ forecasts and investment in the first eight months increased at the slowest pace since 2000.

“The market is not positioned for the Fed to raise rates,” said Aurelija Augulyte, a senior strategist at Nordea Bank AB in Copenhagen, who favors commodity currencies like the Brazilian real and South African rand after they “overshot” their fair values. “The Fed is not in a rush and even if they do hike, which they might, they will talk down the rate path, and maintain the gradualist tone, which should be emerging-market positive.

Bonds

U.S. 10-year Treasuries climbed a second day, with the yield falling two basis points to 2.17 percent at 8:33 a.m. in New York.

The cost of insuring corporate debt held near the lowest in about three weeks. The Markit iTraxx Europe Index, which tracks credit-default swaps on investment-grade companies, was little changed at 71 basis points. The non-investment grade Markit iTraxx Europe Crossover Index fell one basis points to 327 basis points.

Emerging Markets

The MSCI Emerging Markets Index advanced 0.4 percent, with equity benchmarks in Russia, India and Malaysia climbing at least 0.8 percent.

The Shanghai Composite dropped 2.7 percent, while the benchmark index for stocks in the southern city of Shenzhen plunged 6.7 percent, the most since Aug. 25. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong was little changed after capping its biggest weekly advance in five months on Friday.

China’s authorities are faced with a juggling act that’s getting more complex by the month, as they seek to cushion the economic slowdown, support the stock market, stabilize the yuan and press on with reforms to give market forces a bigger role in allocating resources.

India’s rupee advanced 0.3 percent to lead emerging-market currencies higher. The first of India’s two main inflation gauges due Monday showed a deepening price drop, adding pressure on central bank Governor Raghuram Rajan to cut interest rates for a fourth time this year.

Kazakhstan’s tenge sank 5.7 percent, the most since the country switched to a free-floating exchange rate last month, as crude oil fell and Halyk Finance said the central bank’s key interest rate was too low to put a floor under the currency.

Stocks

The Stoxx Europe 600 Index slipped 0.4 percent, after earlier climbing as much as 0.9 percent. Banks and basic resource producers led declines. Futures on the Standard & Poor’s 500 Index were little changed. 

The Stoxx 600 fell 14 percent from its record in April through last week’s close, strategists remain confident the index will rebound and post its best year since 2009. They forecast the gauge will climb about 18 percent in 2015, outperforming U.S. equities and recovering all ground lost after China devalued the yuan in August. The S&P 500 will rise 12 percent from the last close through December, according to projections.

Commodities

Copper and other industrial metals dropped after weak Chinese industrial output and fixed-asset investment bolstered concern that demand growth will stall in the world’s biggest user. Copper lost 1.2 percent, with nickel, zinc and lead losing at least 2 percent. Gold held near a one-month low.

West Texas Intermediate crude fell 0.8 percent to $44.28 a barrel. It sank 2.8 percent on Friday, capping a weekly loss of 3.1 percent amid ongoing concern over a glut. Brent crude dropped 1.6 percent to $47.38.

Goldman Sachs Group Inc. helped stoke declines into the end of last week, saying that oil prices could slide to as low as $20 a barrel as the global surplus is even bigger than they first estimated. Brent dropped 0.9 percent Monday to $47.70, after sinking 3 percent last week.

Currencies

The yen increased 0.2 percent to 120.39 per dollar. Japan also reviews monetary policy this week. With the country’s economy struggling to gather momentum, 11 of 35 economists surveyed by Bloomberg see the central bank stepping up easing measures in October, while two are forecasting a move as soon as Tuesday.

The Australian dollar stayed higher after Malcolm Turnbull won the party ballot to become nation’s prime minister. The Aussie rose 0.5 percent after falling as much as 0.4 percent earlier following the Chinese data.

–With assistance from Jonathan Burgos in Singapore, Emma O’Brien in Wellington and Sofia Horta e Costa, Lucy Meakin, Cecile Vannucci, Amanda Jordan, Neil Denslow and Maria Levitov in London.