US-China trade war batters emerging market stocks and currencies | Fin24

US-China trade war batters emerging market stocks and currencies

Jun 20 2018 06:59
Justin Carrigan, Yumi Teso and Ben Bartenstein, 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 US 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.

“US-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 emerging market currencies to the US dollar 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 re-enter 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 US interest rates. The iShares MSCI Emerging Markets ETF, or EEM, saw over $1.4bn (R20.60bn) 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 $2.2bn (R30.22bn) from the fund, the most for any week since January 2014. 

Intensified trade tension between US, 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 emerging market equities even before the latest escalation of trade tensions since the end of last week,” wrote economist Oliver Jones.

* Sign up to Fin24's top news in your inbox: SUBSCRIBE TO FIN24 NEWSLETTER

donald trump  |  china  |  us  |  currencies  |  rand  |  trade war  |  emerging markets


Company Snapshot

Voting Booth

Do you support a reduction in the public sector wage bill?

Previous results · Suggest a vote