From Hungary to Mexico, emerging markets stocks, bonds and currencies were whiplashed on a volatile Monday as global investors shunned riskier assets amid fears about the health of the US banking system.
(Bloomberg) — From Hungary to Mexico, emerging markets stocks, bonds and currencies were whiplashed on a volatile Monday as global investors shunned riskier assets amid fears about the health of the US banking system.
Stocks from the Middle East to Africa and Latin America tumbled toward their lowest levels this year, while the cost to hedge against default in emerging markets soared to the highest levels since November. A gauge of volatility posted a three-month high. The Mexican peso slid to the weakest in a month versus the dollar, while Hungary’s forint sank against the euro.
The selling came in response to the biggest drop in short-term Treasury yields in years as bond traders quickly scrapped bets on additional Federal Reserve rate hikes amid the turmoil.
“There might be bigger ramification for EM down the road depending on what the Fed will do (or not do), but for now it is risk off. No questions asked,” said Gordian Kemen, the head of emerging-market sovereign strategy at Standard Chartered Plc in New York. “This is obviously all related to the flight to safety in the US banking system which is developing its own gravity field for risk assets.”
Traders also dumped currencies of debt-distressed nations including Pakistan and Sri Lanka. Argentina’s stocks and dollar bonds were among the biggest losers in emerging markets.
A run on Silicon Valley Bank that led to its collapse and takeover by US authorities has shaken investors confidence in monetary conditions at a time the Fed is attempting to tighten policy to tame inflation. The turmoil spread to shares in regional banks as investors rushed out of the industry, signaling a wider slump in risk sentiment. Treasuries and the Japanese yen rallied on Monday, though the dollar failed to benefit from the demand for haven assets.
“Emerging-market volatility today has nothing to do with emerging markets,” said Edwin Gutierrez, the head of emerging-market sovereign debt at abrdn in London. “It’s all about the fall-out from SVB and Treasuries. We’re kind of spectators in this.”
Traders trimmed their expectations for Fed rate hikes and switched to betting on rate cuts later this year as they saw the banking crisis undermining the US financial system and raising the risk of a recession. Such a move could boost the outlook for emerging-market assets, provided the current panic subsides.
Fed, ECB Rate Bets Pared Amid SVB Contagion Fears: TOPLive
“Markets are now pricing a markedly more dovish Fed, which could support EM,” said Patrick Curran, a senior economist at Tellimer Ltd. “On the other hand, financial conditions are tightening anyway due to SVB-related uncertainty. Not sure where that lands us, but I guess a lot will depend on the extent of spillovers which should become clearer as the week progresses.”
Stocks
- MSCI Emerging Markets Index trims gains to 0.7% after rising as much as 1.3%
- Subindex for emerging Europe, Middle East and Africa stocks falls 1.6%, the lowest in two weeks
- Subindex for Latin American stocks drops 2.4% to lowest since Jan. 6
Currencies
- Mexican peso drops as much as 3.6% for the worst performance among major currencies
- MSCI EM Currency Index pares gains to 0.8%, propped up by Asian currencies
Bonds
- Index for average credit default swaps in emerging markets jumps 15 basis points to 257: IHS Markit data
- Extra yield investors demand to own developing-nation sovereign bonds rather than Treasuries widens 11 basis points to 484, according to JPMorgan Chase & Co. data
Volatility
- CBOE Emerging Markets ETV Volatility Index — the EM equivalent of VIX — fell 6.5% to $22.7 per share
- JPMorgan EM Volatility Index for currencies rose for second day, the highest level since December
(Updates prices throughout)
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