Investor appetite for risk is taking a dive

MIDDLE East tensions, Britain’s election and Donald Trump’s troubles combined to dampen investors’ risk appetite on emerging markets yesterday, with currencies suffering and stocks edging lower for a second day.

The decision by several Arab states to cut diplomatic ties with Qatar, accusing it of supporting terrorism, made markets – especially in the region – uneasy.

Also adding to the frayed nerves were three key events scheduled for today – Britain’s general election, a European Central Bank policy meeting and testimony by former FBI director James Comey, which could impact on US President Donald Trump’s economic agenda.

Losses

MSCI’s emerging stock benchmark slipped 0.2 percent, with heavyweight South Korea falling 0.4 percent, while bourses elsewhere in Asia, Turkey and parts of emerging Europe also suffered losses.

“There are worries about the Gulf Co-operation Council (GCC) and Qatar and how that will play out… It’s a geopolitical oil story that has created very much a risk off sentiment,” said Per Hammarlund at SEB.

“In the UK, people are sitting on the sidelines and waiting to see how this will pan out if you have an acrimonious Brexit that will hurt the central and eastern European countries, and it could hurt the EU too, so it has wider ramifications.”

Markets in the Gulf remained under some pressure after US President Donald Trump supported Saudi Arabia against Qatar.

Qatar’s stock exchange fell 0.3 percent, having tumbled nearly 9 percent over the last two days.

Doha’s dollar-denominated debt edged lower across the curve, with some issues trading at their weakest in around 2½ months.

Soft start

Currencies fared little better, despite a steady dollar.

South Africa’s rand has had a soft start to the session after data showed on Tuesday that Africa’s most industrialised nation had slipped into recession for the first time in eight years.

The news raised the prospect of further credit rating downgrades and heaped pressure on President Jacob Zuma, who is already facing corruption allegations.

However, the rand recovered most of its losses to trade 0.2 percent weaker after central bank data showed Forex reserves grew unexpectedly.

“The downgrade question is definitely one of the factors,” said SEB’s Hammarlund, referring to Moody’s next assessment scheduled for release tomorrow.

Positive cycle

“But if you look at the rand and emerging markets in general over the longer term, you are still looking at a positive cycle – the worries about the rand will be short lived.”

Russia’s rouble and Mexico’s peso also weakened against the dollar.

In Poland, central bank policy makers are scheduled to conclude their interest rate setting meeting, though analysts expect no change until the third quarter of 2018 given the benign outlook for inflation.

Interest rates are at an alltime low of 1.5 percent. – Reuters