Slumping confidence in Europe’s banking system spilled over into emerging markets Friday, deepening the first selloff in stocks and currencies in four days. Investors rushed to the relative safety of sovereign bonds, which outperformed Treasuries.
(Bloomberg) — Slumping confidence in Europe’s banking system spilled over into emerging markets Friday, deepening the first selloff in stocks and currencies in four days. Investors rushed to the relative safety of sovereign bonds, which outperformed Treasuries.
The MSCI Emerging Markets Index fell 0.8%, trimming its weekly gain. Financial shares accounted for a third of the gauge’s losses as European bank stocks led by Deutshce Bank AG tumbled. Investors are cutting exposure to the banking sector after policymakers including Federal Reserve Chair Jerome Powell and US Treasury Secretary Janet Yellen acknowledged threats to the financial system and promised remedial steps.
Tightening monetary conditions in the wake of interest-rate hikes by global central banks is exposing hidden weaknesses in the banking system of rich nations. While emerging markets aren’t directly affected by them, a risk-off rush into haven assets such as the Japanese yen and Treasuries sucks capital out of such assets. Latin American stocks and African bonds have been among the worst performers in the past week.
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The “FX world seemed to suggest a bout of risk aversion — or at least preparing for some risk-off event,” Christopher Wong, a foreign exchange strategist at Oversea-Chinese Banking Corp., said in a report. “High-beta proxies,” including South Korea’s won, were the hardest hit on Friday, he said.
On Friday, the six worst-performing stock indexes were from western Europe, while emerging-market stocks displayed relative resilience with Egypt and Israel leading gainers globally. Still, losses for heavyweights such as Alibaba Group Holding Ltd., Reliance Industries Ltd. and China Construction Bank Corp. dragged the benchmark index.
Zambia’s kwacha was the worst performer Friday, dropping to the lowest level since August 2021. Kenya’s shilling and Brazil’s real were other big decliners.
Investors have been reeling from a series of bank collapses that prompted intervention from regulators around the world and sparked volatility in global markets. Measures of implied volatility for developing currencies and stocks rose in New York on Thursday.
Amid the volatility, sovereign bonds were a refuge for emerging-market investors. The average risk premium for developing-market dollar debt over Treasuries narrowed 4 basis points to 496, according to JPMorgan Chase & Co. data. Investment-grade securities witnessed the biggest gains, led by China and South Korea.
As the risk of a recession grows, the swap market is pricing in lower interest rates by year-end, despite Fed Chair Jerome Powell’s insistence Wednesday that officials don’t anticipate cutting rates. That’s sending US yields lower and boosting the appeal of emerging-market debt.
“We think that the market has overshot on rates in the short-term,” said Todd Schubert, Dubai-based head of fixed-income research at Bank of Singapore. “Fixed-income performance globally has been driven by rates, and the positive performance is because of the decline in yields.”
(Updates throughout with Europe’s banking troubles, latest market moves)
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