Emerging equities extend losing streak

Emerging equities hit onemonth lows yesterday set for their longest losing streak since May last year, and Turkey’s lira and South Africa’s rand touched multimonth lows as the dollar and US yields rose.

A 0.6 per cent fall in MSCI’s emerging stocks index extended the benchmark’s sell-off into a sixth straight session. The dollar powered to near one-month highs and US 10-year bond yields to near two-month highs.

US assets have strengthened after the Federal Reserve signalled further interest rate rises and on hopes that tax reform proposals from president Donald Trump will strengthen the economy.

Mr Trump has offered to lower corporate income tax rates, cut taxes for small businesses and reduce the top rate for high-earning individuals. Per Hammarlund, chief emerging markets strategist at SEB, said the package was “more aggressive” than the market expected.

“The market is over-reacting – he will have a tough time getting everything through Congress,” he said, adding tax reform was as controversial as healthcare reform in the world’s largest economy.

New orders for key US-made capital goods increased by more than expected in August, strengthening the case for another rate rise before year-end.

Hong Kong shares were among the biggest laggards, down 0.8 per cent, while Taiwan and Russia lost 0.3 per cent and South Africa slipped 0.4 per cent.

Currencies also took a pounding with China’s yuan weakening over 0.4 per cent to the lowest in more than a month against the dollar, having lost more than 3 per cent of its value since hitting a 21-month high in early August.

The lira dipped to two-and-ahalf month lows before recovering to trade flat, following a vote for independence by the Kurdish population in Iraq that investors fear may inflame separatist tensions in Turkey.

Mr Hammarlund said that while the dollar and Treasury yields were the main factors driving down emerging currencies, the threat of military intervention was a contributing factor for the lira.

“That does worry the market as it would be ill-advised for Turkey to intervene – it could stir domestic violence,” he said.

Turkey’s 2030 dollar bond fell another 0.7 cents according to Tradeweb, plumbing a two-and-a-half month low, with the 2034 and 2036 issues slipping around 0.5 cents.