100 Argentine peso notes are displayed for a photograph in Buenos Aires, Argentina. (Photographer: Diego Giudice/Bloomberg)

Stocks Slide to Cusp of Bear Market on Contagion Fear: Inside EM

(Bloomberg) -- Emerging-market stocks slumped to the edge of bear territory Thursday as fear of contagion spread throughout the developing world.

The MSCI Emerging Market Index of equities extended losses from a January peak to 19.9 percent, just shy of the 20 percent bear-market threshold, while currencies were mixed. Argentina’s peso led gains as Treasury Minister Nicolas Dujovne met officials from the International Monetary Fund, while the Russian ruble tumbled to its weakest in more than two years as the U.S., Canada and a bloc of European nations joined the U.K. in saying a nerve agent attack was "almost certainly" approved by the Kremlin.

Stocks Slide to Cusp of Bear Market on Contagion Fear: Inside EM

"I don’t think the rout is over yet," said Kathy Jones, chief fixed income strategist at Charles Schwab in New York. "With more tariffs on China possible and further Fed tightening, it’s hard to see it ending soon. About the only outlet for some countries in this case is a cheaper currency, especially China."

Some traders are predicting further pain for developing-nation assets, particularly if the Trump administration follows through on its plan for levies on $200 billion of additional Chinese imports after a consultation period ends Thursday. China has threatened to retaliate.

“The very tough conditions for emerging markets are likely to continue for a while and economies with current-account deficits will probably remain a major target of selloffs,” said Takashi Kudo, the head of financial markets research at Fujitomi Co. in Tokyo. “Emerging currencies are seeing some stabilization in the very short term amid a series of supports from respective monetary authorities,” including intervention and rate increases, he said.

U.S. companies hired fewer workers in August than economists estimated, a private report showed Thursday. The ADP figures, published before tomorrow’s official non-farm payrolls report, showed 163,000 new jobs compared with expectations for 200,000. If weaker U.S. employment gains cloud the outlook for rate hikes, demand for riskier assets such as emerging markets may rise.

Highlights:
  • MSCI Emerging Markets Currency Index gained 0.1 percent
  • MSCI Emerging Markets Index fell 0.2 percent to 1,019.69
  • CBOE Emerging Markets ETF Volatility Index dropped 2.5 percent
  • Risk premium on EM sovereigns flat at 376bps: JPMorgan indexes

Analysis:

  • Hedge Fund That Called Emerging-Market Selloff Sees Turnaround
  • Fitch Sees Emerging-Market Contagion Easing as Investors Pause
  • Heroes Go Missing in Emerging Markets as Rout Creates Value
  • It’s Not Time to Hit Emerging-Market Ejector Seat: Nir Kaissar
  • Emerging-Market Rout Is Longest Since 2008 as Confidence Cracks
  • Birthplace of Asian Crisis Becomes Haven in Emerging-Market Rout

Commentary:

  • "I’m bullish now on emerging markets," said Mark Mobius, founder of Mobius Capital Partners in London. "The fact that things have gone down so far and the news is so negative."
  • The silver lining is that so far the selloffs outside Turkey and Argentina are quite consistent with those during the global financial crisis and the taper tantrum, and not deeper like during the Asian financial crisis, said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore.
  • “What I’m looking for is a change in tone in the Federal Reserve as we end 2018," said Jameel Ahmad, global head of currency strategy and market research at FXTM in Limassol. "That potentially they will pause monetary policy normalization headed into next year. This will provide a significant opportunity for a rebound in FX in emerging markets.”

Latin America:

  • ARGENTINA:
    • Merval Index increased 4.1 percent to 29,943.38, highest in almost 11 weeks
    • Peso gained 2.8 percent to 37.35 per dollar
    • IMF said it’s moving quickly to present funding proposal
    • Central Bank Is Last Man Standing in Argentina’s FX Market
    • Creditors Target PGA Golf Course as Argentine Crisis Deepens
  • BRAZIL:
    • Ibovespa rose 1.6 percent to 76,325.44
    • Real gained 1 percent to 4.10 per dollar
    • 10-year local-bond yield fell 26 basis points to 12.39 percent
    • Far-right presidential candidate Jair Bolsonaro, who leads opinion polls, was stabbed during a rally
    • Top court judge rejected former President Lula’s appeal on candidacy
    • Top Fund Bets Everything on Brazil as Election Fears Sink Market
    • Brazil Pro-Market Candidate Criticizes Temer, Other Candidates
  • MEXICO:
    • Mexbol index increased 0.3 percent to 48,738.08
    • Peso gained 0.5 percent to 19.2474 per dollar
    • 10-year local-bond yield dipped three basis points to 8.018 percent
    • Economy Minister Ildefonso Guajardo said Nafta won’t be a deal until Canada finishes talks
    • Bondholders Keep Faith in Mexico Airport AMLO Wanted Ditched
  • Click for market news on ANDES

EMEA:

  • TURKEY:
    • Borsa Istanbul 100 Index little changed at 92,763.31
    • Lira gained 0.2 percent to 6.5884 per dollar
    • Government named two deputies to Treasury and Finance Ministry
    • Turkey Replaces Prosecutor in U.S. Pastor Case: IHA
  • SOUTH AFRICA
    • FTSE/JSE Africa All Share Index little changed at 57,130.48
    • Rand rose 0.6 percent to 15.3259 per dollar
    • 9-year local-bond yield declined three basis points to 9.195 percent
    • Current-account gap narrowed from two-year high
    • Moody’s Cuts South Africa 2018 Economic Growth Forecast by Half
  • RUSSIA:
    • MOEX Russia Index little changed at 2,320.65
    • Ruble declined 1.5 percent to 69.295 per dollar, weakest in more than two years
    • 10-year local-bond yield gained 24 basis points to 9.13 percent
    • U.S., France, Canada and Germany joined the U.K. in saying a nerve agent attack was “almost certainly” approved by the Kremlin
    • Kremlin said it had "nothing to do" with the attack
    • Morgan Stanley said 80 percent chance central bank holds rates
    • Nabiullina’s New Right-Hand Man Offers Less Hawkish Message
  • Click for market news on POLAND and HUNGARY

Asia:

  • CHINA:
    • Shanghai Composite Index dipped 0.5 percent to 2,691.59
    • Offshore yuan declined less than 0.05 percent to 6.8432 per dollar
    • 10-year local-bond yield gained one basis point to 3.635 percent
    • Government said it will retaliate based on U.S. moves
    • Mark Mobius said yuan may sink to 8 per dollar
    • UBS Retreats to Cash in China But Sticks to Troubled Tencent
    • China Stands Between Emerging-Market Turmoil and Global Pain
  • INDIA:
    • Sensex Index increased 0.6 percent to 38,242.81
    • Rupee declined 0.3 percent to 71.988 per dollar, weakest on record
    • 10-year local-bond yield gained two basis points to 8.0568 percent
    • Nation’s top hedge fund raised its cash holdings to a record
    • The lack of meaningful verbal or actual intervention to stem the rupee’s fall is leading to a one-way bet against it, said Madhavi Arora, an economist at Edelweiss Securities in Mumbai
    • Rupee a Hostage to Oil as India Crude Import Bill Jumps 76%
  • Click for more on markets in ASIA

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