Emerging assets slide as yields spark outflows
Global reflation trade underway
LONDON: Emerging market shares and currencies slumped yesterday as investors feared higher US interest rates under incoming President Donald Trump will spark capital outflows, while European bond yields were on course for their biggest weekly rise in a year. Developed market equities held their ground. Europe’s index of 300 leading shares was unchanged on the day, putting it on course for its best week since July, and Japan’s Nikkei rose slightly, even in the face of a stronger yen.
US futures pointed to a slightly lower open on Wall Street, as investors prepared to take some chips off the table after the Dow Jones hit a record high on Thursday. The Dow remains well on track for its best week in five years. The most volatile trading yesterday was across emerging markets, as investors bet that Trump’s fiscal policies will be inflationary, push US rates up and drive investors into dollar-based assets.
This prompted the central banks of Malaysia and Indonesia to intervene in the foreign exchange market to try to stem the outflow of money. “The reflation trade started to shake those most sensitive to higher yields,” said Jim Reid, market strategist at Deutsche Bank. “EM (emerging markets) is clearly also impacted by the anti-globalization side of the Trump victory. Indeed the moves over the last two days have been pretty eye watering,” he said.
MSCI’s emerging market index fell 2.3 percent to its lowest level since July, chalking up its third consecutive weekly decline, while MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.6 percent. Japan’s Nikkei bucked the trend, closing 0.2 percent higher after earlier hitting a 6-1/2-month high. Europe’s Ftseurofirst 300 was up 0.1 percent and Germany’s DAX was up 0.4 percent, while Britain’s FTSE 100 bore the brunt of a rise in sterling above $1.26 and fell 0.6 percent.
Among the biggest fallers in Asia were Indonesian shares, which slumped 3 percent while the rupiah currency fell more than 2.5 percent to 4-1/2-month lows before it stabilised on the Indonesian central bank’s intervention. The Malaysian ringgit also dropped 1 percent to 9 1/2-month lows, and Mexico’s peso fell 1.5 percent to a new record low of 20.84 per dollar.
Fed Reaction Function
It’s been a bruising week for the peso. It has fallen almost 10 percent - its worst week since 2008 and second worst since the 1995 “Tequila” crisis - as investors have taken fright at what a Trump presidency will mean for the Mexican economy. Elsewhere in currencies, the dollar edged down from near three and a half month high against the yen to 106.50 yen , and the euro was steady at $1.0880.
Still, the dollar is having its best week in a year, up 1.7 percent against a basket of currencies, lifted by the rise in US yields and expectations of tighter policy from the Federal Reserve next year and beyond. US bond markets were closed for Veteran’s Day yesterday. But already this week the 10-year Treasury yield has hit its highest levels in 10 months at 2.15 percent, and the 30-year yield a 10month high of 2.96 percent. The 30-year yield rose 38 basis points this week, its biggest weekly jump since 2009. Markets are betting that Trump’s policy stance from protectionism and fiscal expansion will boost inflation. Inflation expectations measured by US inflation-linked bonds rose to 1.87 percent, its highest since July last year, up from low below 1.2 percent touched in February.
HONG KONG: A man stands next to an electronic board showing the Hong Kong stock index outside a local bank yesterday.