Emerging markets hit by Trump turmoil fall for second day

RISING uncertainty over US President Donald Trump’s future slammed emerging markets yesterday, with equities down almost 1% and Brazilian assets taking an additional hit from an escalation in local political risk.

MSCI’s emerging market equity benchmark fell for a second straight day and Russian dollar-denominated stocks chalked up some of the biggest losses with a 1.6% drop.

Developing stocks took their cue from Wall Street, where the Dow and S&P 500 both tumbled 1.8% overnight following reports that Trump had tried to interfere with a federal investigation, throwing doubt over his pro-growth policies and raising the possibility he may be forced to quit the presidency.

An exclusive Reuters report detailing interactions between major players in Trump’s campaign and Russian officials is continuing to roil markets.

Emerging currencies got a drubbing, with the rand, Turkey’s lira and Mexico’s peso all weakening for a second straight session, slipping as much as 2% against the dollar. Yields on local benchmark bonds in Turkey and South Africa hit the highest since the end of last month.

“We are seeing a classic rise in global uncertainty with risk assets being out of favour and positions being closed on some of the most risky emerging markets, such as Turkey and South Africa,” said Crédit Agricole’s head of emerging market strategy, Sebastian Barbe.

“We have been advising clients to be a bit cautious, even before the Trump issues, because volatility was low, good news had been priced in and protectionist fears had already receded.” The rouble weakened nearly 1% in its third straight session of losses as falling oil prices also weighed.

A Brazilian media report implicated President Michel Temer in a corruption scandal that could derail investors’ huge appetite for the country’s assets.

Newspaper O Globo reported that Temer had given his blessing to an attempt to pay a potential witness to remain silent in the country’s biggest-yet graft investigation.

“This is not just the usual political noise that’s spreading to markets. It can impact the ability of the government to finalise reforms which are necessary for the appetite of investors to continue,” Barbe said.

The London-listed iShares MSCI Brazil tumbled more than 12%, although the real remained unchanged against the dollar.

Emerging equities have risen 15% this year and emerging bond returns are among the best in the world, but AllianzGlobal Investors’ head of emerging debt, Greg Saichin, said this appeared to be in peril.

“We have had 21 weeks of inflows into the asset class turning it into a more crowded trade… you have enough flows that could reverse this happy state of affairs,” Saichin said.