Bears Out of Hibernation as Trade Woes Hit Currencies: Inside EM

Posted on by The Editorial Team

Related Post

LAGOS (Capital Markets in Africa) – Stocks in emerging markets sank to a 10-month low and most currencies retreated as heightened anxiety over a global trade war spurred demand for haven assets.

A measure of equity volatility in developing nations surged 13 percent, while technology and consumer stocks led losses in the MSCI Emerging Markets Index. Seventeen out of 24 currencies tracked by Bloomberg fell, led by South Africa’s rand. The gains in Turkey’s lira that followed Recep Tayyip Erdogan’s election victory fizzled out as investors worried that the president’s sweeping new powers may stymie efforts to rein in inflation and the widening current-account deficit.

Traders knocked down the value of assets after China and the European Union vowed to oppose trade protectionism in an apparent rebuke to the U.S., saying unilateral actions risked pushing the world into a recession. Goldman Sachs Asset Management pared its wagers on emerging-market currencies amid escalating trade tension, while Morgan Stanley cut its equity allocation and added to cash.

“Risk aversion flayed overnight with signs that trade tensions are worsening,” said Jane Foley, head of the currency strategy at Rabobank in London. “The fear of trade war is just encouraging more and more outflows.”

Still, UBS Global Wealth Management says emerging-market assets are poised to rally in the second half of 2018, with stocks potentially set for a 15 percent gain. While a stronger dollar, rising interest rates, and intensifying trade tensions have sent stocks to the worst start to a year since the 2013 taper tantrum, those risks may ease in coming months, according to Jorge Mariscal, the emerging-markets chief investment officer at the investment firm.

HIGHLIGHTS:

  • MSCI Emerging Markets Index retreated 1.5 percent to 1,071.95
  • CBOE Emerging Markets ETF Volatility Index climbed most since May 29
  • Vanguard FTSE Emerging Markets ETF declined 1.3 percent#
  • The risk premium on EM sovereigns +7bps to 361bps: JPMorgan indexes

ANALYSIS:

  • Investors With $5 Trillion Have Room to Cut Emerging Debt
  • Emerging Market ETF Outflows Hit $3.38 Bln, Most in Over a Year
  • Goldman, Citi Hunker Down as Trade War Hits Emerging Markets
  • JPMorgan Cuts Year-End Target for MSCI Emerging Markets Index
  • Morgan Stanley Cuts Emerging-Market Equity Allocation, Adds Cash
  • UBS Sees Big Emerging-Market Rebound With Stocks Leading the Way

UPCOMING EVENTS TUESDAY:

  • Argentina economic activity, current account balance
  • Argentina rate decision
  • Mexico unemployment
  • Brazil central bank minutes

LATAM:

  • ARGENTINA:
    • Merval Index fell 4.5 percent to 28,859.85, leading equity losses
    • Peso gained 0.2 percent to 27.07 per dollar
    • A nationwide strike brought much of Argentina to a standstill Monday as labor unions step up their campaign against President Mauricio Macri’s market reforms
    • Argentine ETF tumbled as YPF led losses among ADRs
    • Infobae reported that new central bank President Luis Caputodisagreed with predecessor’s policy of high rates though won’t want to change direction too quickly
  • BRAZIL:
    • Ibovespa gained 0.4 percent to 70,952.97
    • Real rose 0.3 percent to 3.77 per dollar
    • 10-year local-bond yield dipped 16 basis points to 11.99 percent
    • Growth forecasts fell to their lowest since April 2016 as domestic and external uncertainty, coupled with a trucker strike, sapped the economic recovery
    • Supreme Court canceled former President Luiz Inacio Lula da Silva’s trial scheduled for Tuesday, reinforcing the expectation that he won’t be released before October election, according to Eurasia
    • Veteran investor Mark Mobius said he’s “concerned” that the movement for total government reform could slow as a result of the continued popularity of Lula and his supporters
    • The Brazilian real’s implied volatility curve shows that traders see the market calming down after the October election
    • UBS cut price targets for Brazilian banks by as much as 18 percent
    • Brazilian utilities are least exposed to macro risks, Itau BBA said
  • MEXICO:
    • Mexbol index little changed at 46,747.85
    • Peso climbed 0.6 percent to 19.8912 per dollar
    • 10-year local-bond yield little changed at 7.77 percent
    • Bearish peso wagers fell by almost half to 11,480 contracts in the week ending June 19, CFTC data shows
    • Andres Manuel Lopez Obrador maintained his double-digit advantage in two polls released within a week of election day
    • Mexican assets may rally near-term after Lopez Obrador toned down his rhetoric on rolling back structural reforms and vowed to be fiscally responsible, according to BlackRock
    • Citigroup recommends receiving 2-year TIIE on fading expectations of Banxico hike, as a stronger peso after the election should reduce pressure on rate hikes

EMEA:

  • TURKEY:
    • Borsa Istanbul 100 Index fell 1.9 percent to 94,008.29
    • Turkish lira dropped 0.2 percent to 4.6854 per dollar
    • “Political stability is no panacea for the lira,” Tatha Ghose, a senior emerging-markets economist at Commerzbank AG in London, wrote in a note. “The risks to the central bank and monetary policy have just multiplied”
    • Turkish Lira’s Relief Rally Unwinds as Focus Shifts to Policy
    • Here’s What Investors Say About Turkish Lira’s Short-Lived Rally
  • RUSSIA:
    • MOEX Russia Index declined 0.6 percent to 2,236.65
    • Ruble increased 0.2 percent to 62.7825 per dollar
    • 10-year local-bond fell two basis points to 7.66 percent
    • The top Russia ETF saw its biggest inflow in 18 months after OPEC adopted a smaller-than-expected production increase
    • Vladimir Putin’s popularity ratings hit a four-year low on his plan to raise the pension age
    • Bank of Russia Says May Trend Inflation Was 5.2%, Same as April
  • SOUTH AFRICA:
    • FTSE/JSE Africa All Share Index sank 1.8 percent to 49,707.70
    • Rand fell 0.9 percent to 13.5635 per dollar
    • 9-year local-bond yield increased four basis points to 8.909 percent
    • The rand’s 13 percent slump this quarter has left South Africa’s currency fairly valued, according to its real effective exchange rate
    • Foreign investors’ holdings of South African bonds have dropped to the lowest level in more than a year following a record selloff since the beginning of May, and a senior Treasury official says there could be worse to come
    • South Africa’s central bank says it sees limited room for further monetary easing

ASIA:

  • CHINA:
    • Shanghai Composite Index sank 1.1 percent to 2,859.34, lowest in two years
    • Offshore yuan sank 0.5 percent to 6.5396 per dollar, hitting weakest in six months
    • 10-year local-bond yield little changed at 3.59 percent
    • The central bank will cut the amount of cash some lenders must hold as reserves, unlocking about 700 billion yuan ($108 billion) of liquidity, as it seeks to control leverage and support smaller companies
    • White House trade adviser Peter Navarro said a Treasury Department report later this week on American restrictions on Chinese investments won’t be as damaging to growth as markets are anticipating
    • The U.S. Plans Curbs on Chinese Investment, Citing Security Risk
    • China’s Stocks Lurch Lower as Weakening Currency Adds to Risks
    • Nation’s equities are teetering on the brink of a bear market
    • Citigroup goes long USD/CNH position
  • INDIA:
    • Sensex Index fell 0.6 percent to 35,470.35
    • Rupee dipped 0.4 percent to 68.125 per dollar
    • 10-year local-bond yield increased one basis point to 7.8284
    • Investors should short INR/IDR as the recent rally in the pair is inconsistent with sustained outflows from India’s asset markets, while IDR has been undermined by concern about rising religious tensions, RBC Capital Markets says
    • Read how one Indian bank outsmarted its peers on bond trading

Source: Bloomberg Business News

Leave a Comment