Emerg­ing as­sets slide as yields spark out­flows

Global re­fla­tion trade un­der­way

Kuwait Times - - BUSINESS -

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.

— AP

HONG KONG: A man stands next to an elec­tronic board show­ing the Hong Kong stock in­dex out­side a lo­cal bank yes­ter­day.

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