EM stocks down on rising dollar pressure

Emerging market equities traded near three-week lows yesterday, pounded by the rising dollar and higher US yields, while Turkey’s lira fell a mid-July low on fears of fallout from neighbouring Iraqi Kurdistan’s independence vote.

The dollar is close to onemonth highs and 10-year Treasury yields have risen after US Federal Reserve chairwoman Janet Yellen reaffirmed the commitment to tightening policy. US markets are also betting that president Donald Trump’s tax reform programme could finally gain some traction.

Emerging stocks are down around 3 per cent since the September 20 Fed meeting outcome, with MSCI’s index suffering a fifth day of losses.

Index losses were however limited by Hong Kong-listed Chinese shares, which rose half a per cent after Beijing posted data showing robust profits at industrial firms.

Koon Chow, an emerging markets strategist at UBP, said some expectations that there could be action on US taxes was “triggering a reduction in speculative long euro positions and long emerging market currency positions against the dollar”.

Many emerging markets also face domestic headwinds, with the lira down half a per cent to two-month lows and Turkey’s 2030 dollar bond slipping 0.4 cents, according to Tradeweb.

Many investors fear that Monday’s independence referendum in Iraq’s Kurdistan region raises the break-up risks for Iraq and will inflame separatism among Turkey’s Kurds. Ankara has threatened economic sanctions on the region, including choking off its oil exports. Turkish stocks fell 0.6 per cent but stayed off 2-1/2-month highs touched on Monday.

UBP’s Mr Chow noted recent underperformance in Turkish assets due to the Kurdish issue but saw limited near-term impact on Turkey’s economy.

“Even if they do deliver on the threat to blockade oil exports from the Kurdish region that will have more of an impact on the Kurdish region and Iraq than on the Turkish economy. Turkey can always get their oil elsewhere,” he added.

South Africa’s rand fell 0.9 per cent, hurt also by political wrangles between the treasury and the state pension fund over a possible bailout for the state airline.