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Emerging markets on ‘tenterhooks’ as Chinese selloff deepens

Jun 28 2018 07:36
Aline Oyamada and Ben Bartenstein, Bloomberg

The rout in emerging markets deepened as investors sifted through the latest remarks from the Trump administration on protectionist measures, with both currencies and stocks on pace for their worst quarter since September 2015.

Every developing-nation currency tracked by Bloomberg retreated and a measure of shares extended a three-day drop to 3.6%. The Chinese yuan traded offshore slid for a 10th straight day in the longest losing streak since March 2014, while the Hungarian forint sank to a record low as the central bank maintained a dovish monetary stance.

Argentina’s Merval led global equity declines after disappointing economic data. The risk premium on sovereign bonds over US Treasuries widened.

“Global markets remain on tenterhooks,” according to Shireen Darmalingam, a macro-economic strategist at Standard Bank Group in Johannesburg. “Fresh tensions between the US and China continued to damage sentiment and risk appetite for emerging-market assets.”

Investors fret over how a trade war between the world’s two biggest economies could curb growth at a time when the Federal Reserve is accelerating its rate hikes and oil edges higher. While President Donald Trump suggested his administration wouldn’t seek a hard line against Chinese investments, his top economic adviser Larry Kudlow said the talk doesn’t amount to the US retreating in its approach on trade. A leaked report from a Chinese government-backed think tank warned of a potential “financial panic.”

“The volatility we’re seeing in the yuan could reverberate across the rest of emerging markets given the size of the Chinese economy as well as the economic and financial linkages across the region,” said Dushyant Padmanabhan, a currency strategist at Nomura Holdings in Singapore.

Buying emerging-market assets right now is "like catching a falling knife" , Terri Spath, Santa Monica-based chief investment officer of Sierra Investment Management, said on Bloomberg TV.

While valuations in certain EM countries look attractive, EM equities and debt are in a clear downward trend.

“Emerging market local-currency debt is becoming attractively valued again," Julius Baer analyst Markus Allenspach wrote in a note. "Still, we maintain our unattractive rating as we are afraid that the unwinding of leveraged positions will continue for some time."

The South African rand was among the worst performing emerging market currencies, sinking 2.6% to R13.9040 per dollar , while the 9-year local-bond yield increased two basis points to 8.907%.

Amid the rand weakness, foreigners sold a net R1bn worth of debt on Friday.

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