Emerging-Market Bears Return as U.S. Yields Spike

(Bloomberg) -- Emerging-market assets dropped after a surge in 10-year U.S. Treasury yields lifted the dollar and curbed demand for riskier assets. A gauge of equities posted its biggest weekly loss in eight months.

AssetsWeekly Moves
MSCI EM stocks index-4.5 percent
MSCI EM FX index-0.8 percent
Bloomberg Barclays Global EM Local Currency bond index-1 percent

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Highlights for the week ended Oct. 5:

  • U.S. August non-farm payrolls expanded at a pace below forecast while the jobless rate fell more than estimated to a 48-year low
  • The Federal Reserve may eventually raise interest rates to levels where they begin to restrain economic growth, though that’s still some ways off, Chairman Jerome Powell said
  • China accused Mike Pence of slander after the U.S. vice president said Beijing is meddling in American politics; U.S. President Trump may meet his Chinese counterpart Xi Jinping at G-20 summit in Buenos Aires from Nov. 30 to Dec. 1 to discuss trade, a senior White House adviser said
    • The People’s Bank of China over the weekend said it would cut the amount of cash lenders must hold as reserves for the fourth time this year
    • China’s foreign-currency holdings fell by $22.69 billion to $3.087 trillion in September, the PBOC said on Oct. 7
  • Brazil’s real was among the top performers; Jair Bolsonaro, the divisive, far-right former Army captain, stormed to a huge lead in the first round of Brazil’s presidential elections Sunday
  • The Argentine peso was the best performer as the central bank started plans to cut back the amount of pesos in circulation in a bid to tame inflation
  • India’s rupee weakened to a record after the central bank kept interest rates unchanged, opting to assess the impact of previous increases and contain the fallout of defaults from a systemically important lender. Most economists expected a 25bps hike
  • The Turkish lira dropped as data showed inflation rose for a sixth month to 24.5 percent in September from a year earlier; Treasury and Finance Minister Berat Albayrak said policymakers are working on a new action plan to rein in inflation
  • The Philippines Stock Exchange Index extended its weekly losing streak to five as data showed inflation accelerated to the fastest since 2009
  • Russia’s ruble retreated; the country “almost certainly” hacked the U.S. Democratic National Committee’s 2016 presidential campaign, the U.K. said, blaming the Kremlin for a spate of “reckless and indiscriminate” cyber attacks in recent years

Asia:

  • The offshore yuan declined for a second week; onshore financial markets were shut for a week in China due to National Day holidays
    • PBOC over the weekend lowered the required reserve ratio for some lenders by 1 percentage point, effective from Oct. 15. The cut will release a total of 1.2 trillion yuan ($175 billion), of which 450 billion yuan is to be used to repay existing medium-term funding facilities which are maturing
    • The nation’s official manufacturing purchasing managers index dropped to 50.8 in September from 51.3 in August, while the Caixin manufacturing PMI slipped to the lowest since May 2017
    • China said it warned away a U.S. vessel near South China Sea islands; in response, the U.S. accused China’s navy of "unsafe and unprofessional" conduct
  • China used a tiny chip in hack that infiltrated U.S. companies; Taiwan’s Taiex index sank on the week as Asian tech stocks dropped after the story
    • U.S. dollar accounts for more than 70 percent of Taiwan’s foreign-exchange reserves, central bank governor Yang Chin-long said
  • South Korea’s won was Asia’s worst performer; the nation will pursue measures to secure stable funding by revitalizing market demand for long-term bonds, Finance Minister Kim Dong-yeon said
    • Exports fell 8.2 percent from a year ago in September, compared with estimate of 5.5 percent decline
    • U.S. Secretary of State Mike Pompeo will travel to Pyongyang this month to meet with Kim Jong Un and prepare for a second summit between the North Korean leader and Trump
    • A declaration to the end of the Korean War can’t be a “bargaining chip” for getting North Korea to denuclearize, North Korea’s state media said in commentary
  • Indonesia’s rupiah weakened past 15,000 per dollar for the first time since 1998 even as the central bank continued currency intervention; government is monitoring the impact on the economy but sees it as manageable, according to Suahasil Nazara, head of fiscal policy agency at finance ministry
    • Indonesia’s economy is much stronger than during the 1997 Asian financial crisis and the rupiah’s weakness is a source of strength, the World Bank said
    • Bank Indonesia said selling pressure on the rupiah will probably ease next year
    • Consumer prices increased 2.88 percent in September from a year earlier, compared with a forecast 3.09 percent gain
  • India’s rupee dropped for a sixth week; Infrastructure Leasing & Financial Services Ltd. is missing more debt obligations, even as the Indian government pledged to prevent further defaults, underscoring challenges its new board faces in fixing the firm’s mounting debt problems
    • The Sensex index had its worst week since 2016 as oil prices rose
  • The Thai baht dropped by the most since mid-June; Bank of Thailand will step in if the currency moves irregularly, but at the same time it can’t go against the trend, Assistant Governor Jaturong Jantarangs said
    • The monetary policy committee discussed "conditions and appropriate timing to begin normalizing monetary policy in the future," according to the minutes of the BOT rate meeting
    • Inflation slowed to 1.33 percent on year in September from 1.62 percent gain in August

EMEA:

  • Turkey’s Treasury and Finance Ministry drafted a list of exceptions to a ban on contracts in foreign currencies and is circulating the draft to banks, according to four people familiar with the matter
    • President Recep Tayyip Erdogan accused the U.S. of using a jailed American pastor with “dark ties to terror groups” as a pretext to impose sanctions on his country
    • Fitch downgraded the long-term foreign-currency issuer default ratings of 20 Turkish banks and their subsidiaries
    • Turkey’s Borsa Istanbul 100 Index was among the world’s worst performers, ending six weeks of gains as quicker-than-expected inflation pushed real interest rates below zero and triggered renewed outflows from local assets
    • Authorities in Turkey believe Saudi government critic Jamal Khashoggi, who went missing after entering the kingdom’s consulate in Istanbul, was killed there, a Turkish government official said. Saudi Crown Prince Mohammed Bin Salman said the contributor to the Washington Post left the building shortly after entering it. The royal was ready to allow Turkey to search the consulate
    • Erdogan blocked a government initiative to get advice from management consultancy McKinsey & Co., following opposition parties’ criticism that the economy’s reins were being handed over to foreigners
  • Russia’s ruble fell, ending a three-week winning streak; U.S. authorities accused seven Russian nationals of hacking attempts against anti sports-doping groups, the international soccer governing body and an anti-chemical weapons group, aiming to disrupt efforts to investigate Russian activities
    • The central bank almost doubled the yuan’s share in its foreign-exchange and gold assets as of the end of March
    • Finance Ministry cut its borrowing plans for the fourth quarter to ensure market stability
    • President Vladimir Putin supports shift to using national currencies in trade but reducing reliance on the dollar “can’t be a short process and will take time,” Kremlin spokesman Dmitry Peskov said
    • Russia’s MOEX index dropped; Sberbank tumbled almost 8 percent on concern that Emirates NBD may try to reduce its offer for Sberbank’s Turkish unit
  • South Africa’s rand was the worst performer; the risk that inflation will overshoot the 6 percent upper limit of the Reserve Bank’s target should not be underestimated given the volatile global environment, Deputy Governor Daniel Mminele said
    • The country may be driven to the International Monetary Fund if its rising debt goes unchecked without the buffer of savings or new sources of tax revenue, said the country’s National Planning Commission
    • South Africa’s FTSE/JSE Africa All Share Index slid for a second week; MTN Group declined as Nigeria stepped up pressure on the telecommunications company over a disputed repatriation of dividends
    • The tax agency must restore its collection capability that was weakened during the last few years of the previous administration to increase revenue and help stimulate the economy, according to President Cyril Ramaphosa’s economic adviser
    • South African Finance Minister Nhlanhla Nene said he met repeatedly with Gupta family members, who are accused of being in a corrupt relationship with Jacob Zuma, and that the ex-president was the force behind pressure on him twice to sign a multi-billion Russian nuclear-power deal

Latin America:

  • The Brazilian real had its best week since March 2016 and the Ibovespa stock index rallied
    • President Trump said Brazil is treating U.S. companies unfairly; the Latin American nation’s government sees no immediate risk of being targeted with tougher trade policies, according to two officials aware of the matter
  • Mexico’s peso retreated, halting three straight weeks of gains despite announcement of a new trade pact; central bank kept its key rate unchanged at 7.75 percent while sending a hawkish message, signaling future rate hikes can’t be ruled out
    • Trump celebrated a trade deal with Canada and Mexico to replace Nafta as a “historic” win; he is set to sign a successor, the U.S.-Mexico-Canada Agreement, by late November
  • Colombia’s peso had its worst week since the end of August after the central bank announced a dollar-buying program to accumulate foreign exchange reserves
  • The Chilean peso posted the worst performance among Latam peers as copper prices fell for a second week; peso strength is increasingly seen as unsustainable after it rallied almost 4 percent in September

Upcoming data, events:

Sunday, Oct. 7 Brazil First-round presidential election 
Monday, Oct. 8ChinaSept. Caixin services PMI
TaiwanSept. trade data
Tuesday, Oct. 9Russia3Q current-account balance
Mexico, Czech Republic, HungarySept. consumer price index
Wednesday, Oct. 10PhilippinesAug. trade data
Thursday, Oct. 11TurkeyAug. current-account balance
South AfricaAug. manufacturing production
BrazilAug. retail sales
Peru Monetary policy decision
MalaysiaAug. industrial production
South KoreaAug. current-account balance
Friday, Oct. 12ChinaSept. trade data
IndiaSept. consumer price index, Aug. industrial production
South KoreaSept. unemployment rate
RussiaAug. trade data
MexicoAug. industrial production

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