Surge in US bond yields spooks EM stocks, currencies
MAJOR EMERGING MARKETS
A surge in the benchmark US bond yields sparked fears of capital outflows from emerging markets (EMs), hurting their stocks and currencies. Domestic benchmark indices fell nearly three per cent — second-worst single day decline this year — while the rupee dropped nearly a per cent — most since June 24, when the UK voted to leave the European Union.
Other EMs such as Indonesia, Philippines and Brazil fell between three per cent and eight per cent. The 10-year bond yields in the US have increased to 2.15 per cent, compared to last week’s close of 1.78.
The sharp increase triggered a sell-off, as investors worried higher rates in the US would make riskier assets unattractive.
The BSE Sensex lost 699 points, or 2.54 per cent, to close at 26,818.82 — the lowest since June 30. The Nifty 50 ended at 8,296.3, down 229 points, or 2.7 per cent — biggest drop in 2016 and most since February 11. The rupee closed at three-and-a-half month low of 67.25 a dollar, down 0.92 per cent from its previous close of 66.62, mirroring losses in other EM currencies.
The government’s demonetisation decision also weighed on the market performance, with stocks in the automobile, consumer goods and consumer durables sector falling sharply to multi-month lows on concerns the move will severely hurt demand in the near-term.
“Markets fear US Presidentelect Donald Trump’s growth policies may lead to rise in commodity prices. This may result in higher inflation in the US, which the Federal Reserve may tackle by rising interest rates. The accelerated hikes may cause outflows from EMs, including India, putting pressure on the Indian rupee,” said Vaibhav Agrawal, head of research at Angel Broking.
Overseas investors pulled out a massive ~1,500 crore on Friday, adding to their previous two-day selling tally of nearly ~2,000 crore, provisional data provided by stock exchanges showed. Foreign institutional investors (FIIs) have been taking off money from the domestic markets since October, causing volatility and market correction, said analysts.
Ravi Muthukrishnan, cohead, research at ICICI Securities, said FIIs have been pulling out this quarter due to the overhang of the US Presidential election outcome and prospects of US Fed rate hike on global equity markets. He said volatility in foreign institutional investment could remain till December.
EMs, including India, over the past few years have benefited from a loose monetary stance in the developed world. The latest selling was triggered by speculation the Fed will turn aggressive in boosting interest rates under the Trump Administration. “EMs will probably suffer from additional outflows of foreign funds for a long time, with the outlook of a strong dollar and higher US interest rates,” Komsorn Prakobphol, head of strategy, Tisco Financial Group, said to Bloomberg.