Bloomberg — Emerging-market investors hoping for a fourth quarter rebound have faced a selloff erasing most of the remaining case for staying upbeat this week, with fresh causes for concern arising from North Africa to Latin America.
About $266 billion of shareholder wealth was erased even though the biggest emerging economy — China — was closed for holidays. A gauge of returns from carry trades in 18 major developing-nation currencies showed the worst losses since China ended its Covid Zero policy. The global bond slump hit poorer nations hard — sending the average sovereign borrowing costs soaring to highs seen during the pandemic era.
At this rate, this could be the first time since 2015 that carry traders make losses for three successive quarters. Stocks are within a hair’s breadth of falling to the lowest level since 2001 relative to US stocks. Bond yields would cap a third year of increases, also the longest streak since 2015.
“Given that fundamentally there is no relief for US rates yet, even though technically there are some early signs for a plausible stabilization, we remain cautious in emerging markets,” Citigroup Inc. strategists including Dirk Willer wrote in a note. “We prefer to wait for a clearer sign that rates have indeed peaked before wading back in.”
The bruising week, however, could still have a positive surprise for emerging-market investors if the US jobs data prove to be softer than forecast, opening the way for the Federal Reserve to call a peak in its interest-rate cycle. Without a rebound later in the day, riskier assets may face further losses next week when China’s mainland markets reopen.
Meanwhile, fears of deepening debt distress have returned to emerging markets. Egypt was put on notice by the International Monetary Fund’s Managing Director Kristalina Georgieva, who said the nation would bleed foreign-exchange reserves unless it devalued its currency again. Moody’s Investors Service downgraded Egypt to one of the lowest rungs of speculative grade, helping to send its dollar bonds to the worst performance in emerging markets Friday.
Investors began betting that Ethiopia could turn out to be the next country to default on its debt, push its lone dollar bond to the verge of erasing its peace-process gains. Meanwhile, Hungarian yields jumped amid growing evidence of a continued recession.
Latin American currencies have been punished this week in the risk-off shift and policymakers weren’t helping their cause. The Mexican government’s tweaks to its airports tariff policy shocked the stock market, but also spilled over into a peso selloff.
While an earlier spike in oil prices boosted concerns over resurgent inflation and sparked a selloff, this week’s drop in crude futures contributed to losses in currencies such as the Colombian peso.
In the equity markets, meanwhile, the strongest signal of deepening bearishness came from the exchange-trade fund market. BlackRock Inc.’s benchmark fund for the asset class witnessed $757 million of outflows on Thursday alone, the worst in four years. The fund has lost 8% of its assets this week alone.
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