The rout in emerging markets showed no sign of letting up, with an index of stocks slipping toward bear territory and a basket of currencies weakening to its lowest since May 2017.
South Africa’s rand led losses, falling to a two-year low, followed by the South Korean won and Mexican peso. The MSCI Emerging Markets Index of shares extended its slide to 19.7 percent from a January peak. Among the worst-hit stock markets were Saudi Arabia and Indonesia, where benchmark indexes tumbled by the most in about two years. Turkey’s lira rallied, meantime, on speculation the central bank will raise interest rates next week.
The declines added to concern that investor anxiety is beginning to infect markets whose economies are more robust than others. The negative tone was set Tuesday by a U.S. manufacturing report that boosted the odds of further Federal Reserve rate increases and a strengthening dollar, and South African data showing the economy entered into a recession in the second quarter.
It’s “no longer just about EM fundamentals,” Sameer Goel, the head of macro strategy for Asia at Deutsche Bank AG in Singapore, said in a Bloomberg TV interview with David Ingles. It’s “increasingly about contagion, which largely happens because of cross-holdings and the pressure of redemptions.”
HIGHLIGHTS: MSCI Emerging Markets Currency Index fell 0.3 percent MSCI Emerging Markets Index slid 1.4 percent to 1,025.15 CBOE Emerging Markets ETF Volatility Index climbed 11 percent Vanguard FTSE Emerging Markets ETF dropped 2.2 percent Risk premium on EM sovereigns +3bps to 378bps: JPMorgan indexes
Commentary:
"We’re not yet ready to enter into these markets," said Meenal Patel, EMEA head of FX, commodities & rates at JPMorgan Private Bank in London. "The market is very much focused on those currencies with large amounts of external debt."
September is unlikely to provide much relief to emerging markets, James Lord and his colleagues at Morgan Stanley in London wrote in a note, staying short on currencies from Brazil, Mexico, South Africa, Russia, Indonesia, India and the Philippines against the dollar, euro and yen.
“It has to get a lot worse before it gets better," said Kay Van-Petersen, global macro strategist at Saxo Capital Markets. "When you get full contagion, everything gets thrown out, and we’re not there yet.”
Latin America: