Trade War Hits Stocks as $8 Trillion in Bear Market: Inside EM

(Bloomberg) -- Stocks in developing nations slumped as heightened concern that a trade war will sap global economic growth put equity gauges worth $8 trillion in a bear market. Currencies also retreated and are heading toward their worst month since November 2016.

The MSCI Emerging Markets Index sank to the lowest in 10 months, while 18 out of 24 currencies tracked by Bloomberg fell. The Shanghai Composite Index has tumbled 20 percent from its peak in January, with China joining nations such as Turkey and Pakistan in crossing that threshold. The risk premium on sovereign bonds over U.S. Treasuries widened.

Traders are grappling with conflicting signals after President Donald Trump hinted Tuesday at a less confrontational path toward curbing Chinese investments in sensitive U.S. technologies. His remarks seemed to favor the approach of Treasury Secretary Steven Mnuchin over National Trade Council Director Peter Navarro. Earlier, President Xi Jinping reportedly said he would strike back. In addition to tension between the world’s two biggest economies, traders are assessing a scenario of accelerated tightening by the Federal Reserve and impact of higher oil prices.

“This is a dangerous market,” said Jonathan Garner, Morgan Stanley’s chief Asia and emerging markets strategist. “We now think we’re heading to an outright bear market.”

ANALYSIS:

• Pimco Says ‘Grand Strategic Bargain’ Possible to Avert Trade War
• From Turkey to China, Bear Markets Spread Across Emerging World
• MSCI’s EM Currency Index Is at Critical Juncture, Rabobank Says
• Allianz Says Emerging Markets ‘Might Get Hurt’ as Dollar Climbs
• Acadian Sees ‘Very Good’ Value in Stocks of Fragile-Five Nations

LATAM:

• ARGENTINA:
  • Merval Index decreased 1.3 percent to 28,447.57
  • Peso fell 0.1 percent to 27.10 per dollar
  • Nation kept interest rates on hold at 40 percent as seen by economists
  • "I still don’t think we can say the currency tension episode has ended. It would be a bad signal for market expectations if the new administration debuted with an interest rate cut," said Gabriel Zelpo, chief economist at Elypsis
  • TCW Group’s Mauro Roca said it’s difficult to call peso overvalued
  • Economic activity posted its largest contraction in April since President Mauricio Macri took office in December 2015, according to INDEC
• BRAZIL:
  • Ibovespa rose 0.3 percent to 71,179.25
  • Real decreased 0.6 percent to 3.80 per dollar
  • 10-year local-bond yield dipped eight basis points to 11.90 percent
  • Central bank said uncertain scenario was main reason for them to avoid clearly signaling next rate moves
  • Morgan Stanley raised Brazilian mall stocks to overweight
  • Supreme Court Minister Edson Fachin, who canceled trial of ex-president Luiz Inacio Lula da Silva’s appeal previously scheduled for this week, sent case to be debated on Court floor
  • Former finance minister Henrique Meirelles said he’s willing to self-finance his campaign for president
  • How to Make Money Off Brazilian Stocks When They Are Sinking
• MEXICO:
  • Mexbol index climbed 0.4 percent to 46,913.86
  • Peso fell 0.3 percent to 19.9483 per dollar
  • 10-year local-bond yield declined eight basis points to 7.686 percent
  • Alfonso Romo, economic adviser to presidential frontrunner Andres Manuel Lopez Obrador, told Reuters the peso is undervalued and promised to strengthen it
  • Trading volumes are above average while liquidity conditions slightly worse than average, which may exaggerate price moves as short MXN positions unwind, according to NY-based traders
  • Federal Reserve Bank of Dallas President Robert Kaplan said the U.S. would be "much more potent" fighting threat of China if it weren’t engaged in battles with friends such as Mexico
• Click for market news on ANDES

EMEA:

• TURKEY:
  • Borsa Istanbul 100 Index increased 0.4 percent to 94,408.19
  • Turkish lira gained 1.5 percent to 4.613 per dollar
  • Veteran investor Mark Mobius recommends buying lira as "a weak currency is not necessarily a bad thing"
  • Moody’s said recent policies by Erdogan administration have “heightened Turkish corporates’ and banks’ exposure to currency depreciation and the economy’s exposure to the widening current account deficit”
  • Nomura economist Inan Demir said election outcome doesn’t solve most important question for Turkish economy: "how to avoid a hard landing”
• RUSSIA:
  • MOEX Russia Index declined 0.1 percent to 2,234.51
  • Ruble sank 0.5 percent to 63.1025 per dollar
  • 10-year local-bond yield rose 10 basis points to 7.75 percent
  • Interfax reports government may borrow up to $3 billion externally
  • Short-term outlook “mixed” for ruble with OPEC raising output positive and trade war tensions a “spoiler,” said Igor Rapokhin, an analyst at BCS brokerage
  • Record-low inflation set to surge higher next year, according to Bloomberg Intelligence
• SOUTH AFRICA:
  • FTSE/JSE Africa All Share Index sank 1.1 percent to 49,138.59, lowest in almost 12 weeks
  • Rand little changed at 13.5439 per dollar
  • 9-year local-bond yield fell two basis points to 8.886 percent
  • Fear is that full-blown trade war will nudge U.S. economy into a recession and leave South African markets vulnerable amid flight to safe-haven assets, said FirstRand Bank fixed-income trader Michelle Wohlberg
  • Moody’s says move to change constitution to allow expropriation without compensation could deter investment
  • Inflation set to accelerate on food costs in the second half of 2018, according to Bloomberg Intelligence
• Click for market news on POLAND and HUNGARY

ASIA:

• CHINA:
  • Shanghai Composite Index sank 0.5 percent to 2,844.51, lowest in about two years
  • Offshore yuan dipped 0.6 percent to 6.5818 per dollar, weakest in about six months
  • 10-year local-bond yield dropped one basis point to 3.585 percent
  • Benchmark equity gauge entered a bear market amid growing concern about the country’s resilience to a trade war
  • China Stock Rout May Worsen, Analysts Warn No End in Sight
  • President Xi Jinping told a group of U.S. and European CEOs that he will strike back at U.S. trade measures, the Wall Street Journal reported
  • Finance Ministry says it plans to sell 5 billion yuan bonds in Hong Kong "soon"
  • China ETF That Lured Millions Turns Sour as Trade War Escalates
• INDIA:
  • Sensex Index increased 0.1 percent to 35,490.04
  • Rupee decreased 0.2 percent to 68.251 per dollar
  • 10-year local-bond yield fell one basis point to 7.8286 percent
  • While rising trade tensions weigh on sentiment, India should outperform as oil prices stabilize and domestic flows remain strong, said Sunil Sharma, CIO at Sanctum Wealth Management
  • Prime Minister Narendra Modi said government is firmly committed to path of fiscal consolidation
  • Macro-stress tests indicate the gross bad loan ratio of Indian banks may rise to 12.2 percent by March 2019 from 11.6 percent year ago, according to RBI’s Financial Stability Report
  • Traders are awaiting a decision on farm support prices to gauge inflation outlook
• Click for more on markets in ASIA

--With assistance from Srinivasan Sivabalan and Michelle Jamrisko.

To contact the reporters on this story: Ben Bartenstein in New York at bbartenstei3@bloomberg.net;Giulia Morpurgo in New York at gmorpurgo1@bloomberg.net

To contact the editor responsible for this story: Rita Nazareth at rnazareth@bloomberg.net

©2018 Bloomberg L.P.