Emerging Markets Selloff Pauses As Dollar Consolidates Gains
Emerging-market assets steadied as the US dollar and Treasury yields have consolidated gains, reducing pressure on riskier markets.
(Bloomberg) -- Emerging-market assets steadied as the US dollar and Treasury yields have consolidated gains, reducing pressure on riskier markets.
The MSCI emerging markets equity index posted a modest rise in its first advance in five days. It lost almost 5%, erasing this year’s rally, over the previous four days amid a surge in the US dollar and flight to safety due to fears about a wider war in the Middle East and postponement of Federal Reserve interest rate expectations.
Treasury yields traded in a narrow range near 2024 highs, and a gauge of the dollar held near a five-month high after Federal Reserve Chair Jerome Powell said Tuesday it would likely take longer to have confidence that inflation is headed toward target.
Emerging-market currencies were mixed today after the selloff placed each of the 24 emerging market currencies tracked by Bloomberg in red for the year. The CSI 2000 Index of small-cap companies jumped 7% after China’s top securities regulator tried to allay investor concerns about new stock exchange rules following a rout in small-cap shares, saying they don’t expect a surge in delistings as a result of the changes.
“The only thing that has changed is a reset for Fed rate cut expectations so the positive drivers present at the start of the year are still there,” said Ian Simmons, a London-based fund manager at Fiera Capital. “Most large markets are enjoying cyclical and structural improvements with other exciting opportunities in the smaller markets.”
Emerging-market dollar bonds steadied on Wednesday from the worst selloff since September 2022.
The external debt of Sri Lanka, Ukraine, Turkey advanced, leading gains in the Bloomberg EM Sovereign Total Return Index. As many as 400 of the 669 bonds in the gauge rose, with indicative intra-day data from JPMorgan Chase & Co. showing that the average sovereign risk premium over Treasuries narrowed.
The gains follow a five-day selloff when investors dumped high-yield dollar bonds after stubborn US inflation reduced the room for the Fed to start cutting interest rates. Money markets no longer priced a Fed cut in September, pushing their expectation to November, a cue for emerging-market policymakers to keep monetary policy tighter too.
As a result, the average yield on the sovereign index jumped 52 basis points, the steepest five-day increase since the height of the post-Covid debt crisis 19 months ago. The risk spread over Treasuries jumped 25 basis points in four days, the worst since March 2023, when the collapse of the US startup-focused bank had raised fears of a global contagion.
Sri Lanka, Argentina, Ghana, Egypt and El Salvador were the worst performers in the latest risk-off shift, signaling that investors are calling time on a high-yield rally predicated on their fiscal turnaround stories.
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