Trade-War Clamor Batters Emerging Stocks, Currencies: Inside EM

(Bloomberg) -- Emerging markets were left reeling as the world’s two biggest economies threatened punishing tariffs in the early shots of a trade war. Stocks slid to the lowest since October and currencies dropped a sixth day.

The MSCI Emerging Markets Index of equities sank below the 1,100 mark, which has historically limited losses, amid concern that a tit-for-tat tariff showdown between the U.S. and China will crimp global growth. All but five of the 24 emerging-market currencies tracked by Bloomberg retreated, while sovereign yield spreads blew out an average of 9 basis points versus Treasuries.

“U.S.-China trade policy tensions are certainly driving the market of late and affecting investor sentiment, said Morgan Harting, a money manager at AllianceBernstein in New York. “We’re doing a lot more hedging of EM currencies to the USD in this environment which is also proving to be protective."

Investors have been selling emerging-market assets as the growing prospect of a prolonged trade war compounds the impact of a more hawkish Federal Reserve and European Central Bank, a strengthening dollar and political risks escalating across Europe. Currency crises in Turkey and Argentina in recent weeks have also soured sentiment.

A Bloomberg currency index that measures carry-trade returns from eight emerging markets, funded by short positions in the dollar, has slumped since the end of March and is set for its biggest quarterly loss since 2011. After rallying in the five quarters through March, what’s turned the strategy around is the dollar’s recovery toward an 11-month high.

Emerging Stocks Reenter Zone of Underperformance as Rout Deepens

Investors are deserting the second-largest exchange-traded fund tracking emerging-market equities amid a currency rout for the developing nations and higher U.S. interest rates. The iShares MSCI Emerging Markets ETF, or EEM, saw over $1.4 billion worth of outflows on Monday, the most since two days after President Donald Trump’s election in November 2016. This exodus has continued from last week, when investors yanked $2.2 billion from the fund, the most for any week since January 2014.

Intensified trade tension between U.S, and China is just another reason to be bearish on emerging-market stocks, according to Capital Economics.

“We were still pessimistic about the near-term outlook for EM equities even before the latest escalation of trade tensions since the end of last week,” wrote economist Oliver Jones.

HIGHLIGHTS:
  • MSCI Emerging Markets Index fell 1.9 percent
  • CBOE Emerging Markets ETF Volatility Index climbed 7 percent
  • MSCI EM Currency Index slid to the lowest level since November
  • Risk premium on EM sovereigns rose to 373 bps: JPMorgan indexes

UPCOMING EVENTS WEDNESDAY:

  • MSCI Inc. to announce results of its 2018 Market Classification Review, including whether Argentina and Saudi Arabia indexes get reclassified to emerging-market status
  • Brazil may keep borrowing costs unchanged for a second straight meeting after a 10-day nationwide truckers’ strike choked the economy
  • Thailand is expected to keep rates near a record-low 1.5 percent
  • The Philippines’ central bank faces pressure to raise a key interest rate for the second straight month

LATAM:

  • BRAZIL:
    • Ibovespa gained 2.3 percent to 71,394.38
    • Real little changed at 3.75 per dollar
    • 10-year local-bond yield dipped 24 basis points to 11.89 percent
    • All but one economist in a Bloomberg survey expect policy makers to hold the key rate at 6.5 percent on Wednesday
    • Rio Hedge-Fund Guru Is Biggest Loser as Bets on Brazil Turn Sour
    • Brazil June IGP-M Inflation 2nd Preview 1.75% M/m; Est. 1.67%
  • MEXICO:
  • ARGENTINA:
    • Merval Index advanced 5.1 percent to 29,069.27
    • Peso fell 0.7 percent to 27.78 per dollar
    • Ex-Wall Street Trader Feels the Heat Atop Argentina Central Bank
    • Argentina Sells $4b in Dual Currency and Treasury Bonds
    • Argentina Extends Exchange Offer for Dollar Bonds to June 22
  • Click for market news on ANDES

EMEA:

  • RUSSIA:
    • MOEX Russia Index dipped 0.1 percent to 2,221.42
    • Ruble dipped 0.6 percent to 63.825 per dollar
    • 10-year local-bond yield flat at 7.87 percent, highest in about 11 months
    • Country scaled down its offer of short-maturity bonds at a weekly auction on Wednesday after a selloff across emerging markets and a hawkish tilt from the central bank sent borrowing costs surging
    • Russia to Retaliate Against U.S. Soon With Tariffs on Imports
  • SOUTH AFRICA:
    • FTSE/JSE Africa All Share Index sank 1.9 percent to 50,020.40, biggest tumble in almost seven weeks
    • Rand decreased 0.9 percent to 13.7681 per dollar, weakest in about seven months
    • 9-year local-bond yield increased seven basis points to 9.163 percent, highest in more than eight years
    • South Africa’s SARB Says Will Act on Effect of Rand Weakness
    • South Africa Bond Auction Entices Buyers Amid Sell-Off: Chart
  • Click for market news on TURKEY, POLAND and HUNGARY

ASIA:

  • CHINA:
    • Shanghai Composite Index sank 3.8 percent to 2,907.82, lowest in about two years
    • Offshore yuan lost 0.4 percent to 6.4772 per dollar
    • 10-year local-bond yield fell three basis points to 3.59 percent
    • China to Act ‘Forcefully’ on Trump’s $200 Billion Tariff Threat
    • Trump Tariff Gambit Risks China Stink-Bomb Reprisal: Macro Man
    • US-China Trade War Risk Higher Post Trade Announcement, S&P Says
    • Juckes Says Don’t Leave Home Without a ’Yen in Your Back Pocket
  • INDIA:
    • Sensex Index sank 0.7 percent to 35,286.74
    • Rupee fell 0.6 percent to 68.385 per dollar
    • 10-year local-bond yield gained four basis points to 7.9191 percent
    • Limited Value in Most India High-Yield USD Corporate Bonds: JPM
    • Credit Outlook for Indian Corporates Seen Stable in FY19: ICRA
    • A Billionaire’s Folly Becomes a Nightmare for Bankers in India
    • Kraft Heinz Is Said to Mull $1 Billion Complan Sale in India
  • Click for more on markets in ASIA

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