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Emerging equity slump deepens on Brexit fallout

London - Emerging-market stocks and currencies fell for a second day as Britain’s decision to exit the European Union roiled markets amid concern a protracted crisis will sap global economic growth. Bonds in developing Europe rose.

Equities in the Czech Republic, South Africa and Poland, which count Britain as a major trading partner, slumped at least 1.7%, and their currencies retreated more than most peers in the developing world. Energy stocks in Israel and Turkey climbed after the two nations ended years of estrangement.

The rebound in Polish and Turkish local-currency debt pushed 10-year yields toward the biggest drops in emerging markets after Franklin Templeton bond fund manager Michael Hasenstab said risk aversion would be temporary.

As internal revolts within Britain’s two major parties sent the pound tumbling to a three-decade low, concern is mounting that the so-called Brexit will undermine global economic growth and spill over into the UK’s biggest trading partners.

Countries in emerging Europe face the additional burden of losing financial support from the EU once the third-biggest net contributor to the bloc’s budget pulls out.

"The markets most vulnerable to Brexit, such as South Africa and those in Eastern Europe, are still suffering," said William Jackson, an emerging-market analyst at Capital Economics in London.

"Volatility is likely to continue in the next few days and we may see sentiment shift in line with UK political development. Brexit will continue to be the main concern over the next week or so."

A struggle within the Conservative Party to replace Prime Minister David Cameron is under way with some members of parliament moving to block pro-Brexit lawmaker Boris Johnson from the position.

Labour Party leader Jeremy Corbyn is also facing a wide revolt, with the majority of his shadow cabinet having resigned in protest at his leadership.

The premium investors demand to hold emerging-market sovereign debt rather than US Treasuries increased 11 basis points to 410, the highest level since June 16, according to JPMorgan Chase indices.

Investor inflows into exchange-traded funds that buy emerging market stocks and bonds reached the highest level in almost three months last week even after markets tumbled following the UK vote.

Net flows into emerging market ETFs that invest across developing nations as well as those that target specific countries rose to $1.75bn from $58m in the previous period, according to data compiled by Bloomberg.

Stocks

The MSCI Emerging Markets Index of shares dropped 1% to 798.2 by 1:26 p.m. in London, extending a two-day decline to 4.5%, the most since August. All 10 industry groups declined in the index, led by consumer, technology and banking stocks.'

The PX Index lost 3.4% in Prague, heading for the lowest close in seven years, the WIG20 Index fell 1.9% in Warsaw and Russia’s Micex Index retreated 1.4%. Hungarian low-cost carrier Wizz Air Holdings fell 9.7% in London to the lowest level since May 2015.

Goldman Sachs cut the airline’s price estimate by 14%, saying it was most exposed to Brexit among regional peers because of its exposure to the UK market.

Other companies that export to the UK also declined. Gazprom PJSC dropped 1.6% in Moscow and Impala Platinum Holdings slumped as much as 1.8% in Johannesburg.

Energy-related stocks across Turkey and Israel advanced after officials signalled the two countries have mended diplomatic ties, potentially paving the way for multi-billion dollar gas contracts. The Borsa Istanbul Electricity Sector Index climbed the most since February and the TA-Oil & Gas Index in Tel Aviv rose the most in a week.

The Shanghai Composite Index gained 1.5% after dropping 1.3% on Friday.

Currencies

The MSCI Emerging Markets Currency Index weakened 0.7% after dropping 1.3% on Friday. A measure of historical volatility over the past 100 days surged to the highest level since March 2012.

The zloty depreciated 0.4%, the koruna lost 0.3% and the Hungarian forint depreciated 0.3% against the euro. The rand weakened 1.8%, bringing its two-day drop to 6.7%, the most since December.

Malaysia’s ringgit slumped to a three-week low as a decline in crude oil on Friday worsened the outlook for its exports. Brent crude slid 0.7% to $48.05 a barrel in London, reversing an earlier gain of as much as 1%.

The People’s Bank of China lowered the reference rate for the yuan by 0.9% to 6.6375 per dollar. The fixing - from which the spot rate can diverge a maximum 2% - is set using the previous day’s onshore close, overnight moves in major currencies, as well as market demand and supply.

Bonds

Yields on Turkish 10-year local currency notes fell 13 basis points to 9.6% while those on similar-maturity Polish bonds declined 10 basis points to 3.07%.

Hasenstab, who manages the $48bn US-incorporated Templeton Global Bond Fund, said he was looking to take advantage of some market "dislocations" after the UK Brexit vote.

"Once people begin to distil what really matters surrounding the outcome of this event for Europe and the rest of the world, I think that some of those risk assets in emerging markets that sold off will begin to recover," he wrote in a commentary.

The Global Bond Fund’s main shareholdings are in Mexico, Brazil and South Korea.

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