Emerging market equities hit; rupee tumbles to all-time low
MSCI INDEX EXTENDS LOSSES TO REACH ITS LOWEST LEVEL IN 14 MONTHS ON LIQUIDITY FEARS
First currencies in emerging markets were hit, now the focus has shifted to equities. The Turkish lira and Argentine peso were hit as the stronger dollar adversely impacted the countries’ macro fundamentals, triggering concerns of contagion on other currencies, and asset classes.
Yesterday, the MSCI emerging market index extended losses to hit its lowest level in 14 months, nearing the bear market zone.
The MSCI Emerging Markets Index traded 0.13 per cent lower at 1,020.43 after hitting a low of 1,018.46, nearing the lowest level since July 2017.
China, South Korea, Taiwan and India account for four of the five biggest weightings in the MSCI index. Companies based in Asia account for around 75 per cent of that gauge, and just shy of 70 per cent of the equivalent FTSE benchmark, according to data compiled by Bloomberg. Both indexes are down a little more than 12 per cent this year.
Shanghai lost 0.5 per cent, Seoul sank 0.2 per cent and Singapore was 0.4 per cent off yesterday. Tokyo ended 0.4 per cent lower, while Hong Kong shed 1 per cent after diving 2.6 per cent on Wednesday.
“Macro fundamentals are under pressure in emerging markets due to a squeeze in dollar liquidity and recovering oil prices for all oil importing countries. When the going is tough for the macro, equities are one of the asset classes which reflect the sentiment more quickly,” Mohammad Shabbir, fund manager at Saudi Kuwaiti Finance House told Gulf News.
The index has shed 19.7 per cent since the start of January, nearing bear market territory. “Trade tensions are not the only factor dragging emerging currencies lower against the dollar. It’s the end of Quantitative Easing and a decade of near-zero interest rates that are hitting emerging markets and expect the situation to become even worse if the US Federal Reserve doesn’t slow down the tightening of its monetary policy,” Hussain Sayed, Chief Market Strategist at FXTM said.
The Federal Reserve is expected to continue on its path of further rate hikes, which may further strengthen the dollar, making emerging markets more vulnerable.
Meanwhile, the Indian rupee’s woeful run continued for the seventh straight session. It touched a fresh all-time low of more than 72 to the dollar during trade yesterday, hitting a low of 72.1050, before closing at 71.9875.
“With India importing a large swathe of its fuel needs, rising oil prices will naturally lead to a higher dollar bill, which in turn will naturally weaken the rupee. With world matters unlikely to see any concrete solutions soon, we believe that the rupee could weaken a bit more against the US dollar,” Adeeb Ahamad, Managing Director, LuLu Financial Group said.
The rupee has shed more than 12 per cent so far this year.
Other currencies however stabilised. The Turkish lira was up 0.21 per cent to 6.5875 against the dollar, while Argentine peso was down 2 per cent.
Oil traded near $69 a barrel yesterday as an industry report showed US crude inventories declined last week, ahead of government data.
Futures in New York erased Wednesday’s losses reaching as high as $68.95 a barrel. The American Petroleum Institute was said to report US crude stockpiles fell 1.17 million barrels last week, despite a 631,000-barrel build at the Cushing, Oklahoma, storage hub. Data from the US Energy Information Administration was due later yesterday.
West Texas Intermediate for October delivery traded at $68.82 a barrel on the New York Mercantile Exchange, up 10 cents, at 8.18am local time. The contract slumped $1.15 to $68.72 on Wednesday. Total volume traded was 28 per cent below the 100-day average.
Brent for November settlement gained 22 cents to $77.49 a barrel on the ICE Futures Europe exchange, after losing 1.2 per cent on Wednesday. The global benchmark crude traded at a $8.93 premium to WTI for the same month.
Crude prices have been caught in a tug of war between bulls and bears in recent weeks as speculation that US sanctions on Iran’s exports will tighten global supplies, countering signs of rising inventories and pledges by other Opec members to boost output.
Amid fear that contagion will spread across emerging markets, concerns are growing that oil demand will weaken as a stronger dollar makes imports more expensive for developing economies.
“The biggest story out there is the continued pain that is being inflicted on emerging market bonds, stocks and not least currencies,” said Ole Sloth Hansen, head of commodity strategy at Saxo Bank.
“On that basis, crude oil is seeing some selling pressure — not only from speculative traders who rushed back into long positions last week, but also the continued worry about global and not least emerging market demand growth going forward.”
Countering the emergingmarket issue is “the yet unknown impact on Iran’s ability to produce and export” amid looming US sanctions, said Hansen.
“These concerns are likely to keep the downside risk on Brent capped at $75.”