Massive Argentine Currency Plunge Deepens Emerging-Market Rout

(Bloomberg) -- The brutal tumble of Argentina’s peso added to the list of concerns over the ability of developing economies to defend their currencies as the era of cheap money wanes. Emerging-market assets extended losses a day after the Federal Reserve’s more hawkish signals.

A measure of currencies in developing nations slid to the lowest since December, while the MSCI Emerging Markets Index sank -- led by industrial and technology companies. The Argentine peso slumped more than 6 percent on reports of changes at the country’s central bank and after truck drivers began a strike. The Brazilian real dropped a fourth day as the impact of a massive sale of foreign-exchange swaps was short lived.

Developing-nation assets took a beating as signals of a slightly more aggressive pace of Fed hikes added to concern over further currency depreciation in developing economies. Meanwhile, the European Central Bank said a rate increase won’t come until the summer of 2019, though it announced it would end stimulus in December, setting the euro area up for an exit from years of heavy monetary support.

COMMENTS:

  • Selloff in emerging-market currencies could be big enough to push Mexico, Brazil, South Africa to raise interest rates, wrote Neil Shearing, an economist at CapEcon
    • History suggests central banks raise rates when currency falls more than 10% within two months and inflation is running above target and/or is on a rising trend
  • Argentine peso could overshoot and hit "stratospheric" lows without intervention, according to Alejandro Cuadrado, the global head of foreign exchange at BBVA
    • “We are still very much flow dependent. And the ARS is quite naked"
  • “The market knows the central bank [of Brazil] allows itself to get deeply behind the curve, and is merely acting rationally by selling the real and shorting bonds," said James Gulbrandsen, a Rio de Janeiro-based money manager who helps oversee $3.5 billion of assets at NCH Capital. “This is economics 101. If you suppress prices, you create market distortions and arbitrage. And the market always wins”

HIGHLIGHTS:

  • MSCI Emerging Markets Index declined 0.9 percent to 1,125.71
  • CBOE EM ETF Volatility Index extended 2-day advance to 5.9 percent
  • 21 out of 24 developing-nation currencies tracked by Bloomberg fell
  • Risk premium on EM sovereigns +3bps to 354bps: JPMorgan indexes

LATAM:

  • ARGENTINA:
    • Merval Index dipped 0.4 percent to 30,114.88
    • Peso sank 6.1 percent to 27.70 per dollar -- record low
    • Argentine columnist Marcelo Bonelli reported that three central bank directors would be resigning from their posts soon. The central bank declined to comment
    • In another setback for President Mauricio Macri, truck drivers went on a nationwide strike as other labor unions have threatened to join the stoppage
    • Banks Lead Argentina Losses as Peso Falls to Record Lows
    • As Argentine Peso Craters, Stock Pickers Pin Hope on Upgrade
  • BRAZIL:
    • Ibovespa dipped 1 percent to 71,421.20
    • Real declined 2.2 percent to 3.81 per dollar
    • 10-year local-bond yield gained 51 basis points to 12.35 percent
    • Real Extends Decline Even After BCB’s Record Intervention
    • Brazil Sells All 20,000 FX Swaps Offered in 3nd Extra Auction
    • Brazil’s FX Intervention Pledge Questioned After Rate Surprise
    • It is difficult to justify a Selic hike in Brazil at next week’s policy meeting as currency is close to the level it was seen at the previous decision, when traders were looking for a rate cut: MRJ Marejo
  • MEXICO:
    • Mexbol index increased 0.9 percent to 47,197.24
    • Peso little changed at 20.8775 per dollar
    • 10-year local-bond yield gained three basis points to 7.987 percent
    • Mexico’s peso looks set for more pain as the country’s presidential vote approaches, according to a technical indicator
    • Mexico’s Obrador Will Work to Calm Markets, Campaign Chief Says
    • Nafta Talks to Continue Through Summer in Push For Deal: Canada
    • Winning on Peso Volatility Requires Getting the Price Right
  • Click for market news on ANDES

EMEA:

  • TURKEY:
    • Borsa Istanbul 100 Index rose 1.1 percent to 94,540.84
    • Lira declined 1.7 percent to 4.7264 per dollar - weakest on record
    • 10-year local-bond yield rose to 15.69 percent, highest on record
    • Turkey Cenbank Expects Pressure on Inflation to Continue in June
    • Turkey Elections ‘Expected to Have Unstable Outcome’: ABN Amro
    • Erdogan: Turkey to Conduct an Operation Against Moody’s
  • SOUTH AFRICA:
    • FTSE/JSE Africa All Share Index increased 0.1 percent to 58,495.67
    • Rand declined 1.1 percent to 13.4624 per dollar
    • 9-year local-bond yield fell three basis points to 8.948 percent
    • South Africa Spells Out Case Against Suspended Tax Chief
    • S. Africa’s Eskom Starts Blackouts as Protests Disrupt Plants
  • RUSSIA:
    • MOEX Russia Index dipped 0.8 percent to 2,253.48
    • Ruble declined 0.2 percent to 62.63 per dollar
    • 10-year local-bond yield fell two basis points to 7.56 percent
    • Exactly half of the 42 economists surveyed by Bloomberg predict the key rate will stay at 7.25 percent, while the rest say the central bank will come down in favor of a cut to bring the benchmark to the 7 percent top end of the neutral band
    • Russia on Cusp of Rate Threshold Will Think Twice About Next Cut
    • Russia Plans to Raise Retirement Age, Increase Value-Added Tax
  • Click for market news on POLAND and HUNGARY

ASIA:

  • CHINA:
    • Shanghai Composite Index dipped 0.2 percent to 3,044.16
    • Offshore yuan declined 0.4 percent to 6.4173 per dollar
    • 10-year local-bond yield slid three basis points to 3.6475 percent
    • The unexpected move by the PBOC to keep borrowing costs is a sign of confidence the yuan can withstand pressure, according to analysts
    • "It appears that the PBOC holds strong confidence on yuan stability and even a symbolic hike in reverse repo yield is not needed," Mizuho Bank senior currency strategist Ken Cheung wrote
    • Trump Says He May Upset China on Trade as U.S. Tariffs Loom
  • INDIA:
    • Sensex Index fell 0.4 percent to 35,599.82
    • Rupee little changed at 67.631 per dollar
    • 10-year local-bond yield gained one basis point to 7.942 percent
    • India’s wholesale price inflation accelerated to the highest in 14 months in May, underpinning a view that price pressures were growing and could push the central bank to further tighten policy
    • Nomura Says Intervention Can Snap India Bonds’ Vicious Cycle
    • India Inc. Sells Record Debt to Savers Amid Tight Credit
  • Click for more on markets in ASIA

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