Emerging-Markets Rout Deepens as Europe Shares Rise

An emerging-markets selloff deepened amid concern developing economies will face capital outflows and weakening exports once Donald Trump is in The White House, while optimism surrounding his policies spurred gains in commodities and European shares rose.

MSCI gauges of emerging-market equities and currencies sank to four-month lows since the election of Trump, who pledged to restrict imports and add fiscal stimulus that’s seen hastening interest-rate hikes by the Federal Reserve. More than $1 trillion was wiped off the value of bonds this week, something that’s happened only once before in the last two decades, as Treasuries lost the most since 2009. Shanghai shares entered a bull market, while industrial metals had their best week in more than 25 years.

Developing-nation assets have been roiled since Trump’s surprise win in Tuesday’s vote and central banks in India and Indonesia were said to have intervened Friday in support of their currencies. Futures indicate an 80 percent chance that the Fed will raise rates next month and expectations are building for more increases. Ten-year Treasury yields have climbed above 2 percent for the first time since January amid speculation the president-elect’s plans to cut taxes and boost spending will widen the U.S. budget deficit and stoke inflation.

“There’s been a big rotation out of emerging markets into U.S. dollar assets,” said Jeffrey Halley, a market strategist at Oanda Asia Pacific Pte in Singapore. “An emerging market is a market you can’t emerge from in an emergency. It’s one of the best lessons I’ve ever learnt in 30 years in the market. When everybody runs for the door at the same time, the door’s very small.”

Stocks

The MSCI Emerging Markets Index dropped 2 percent as of 8:05 a.m. London time. The Jakarta Composite Index tumbled by the most in a year and the Philippine Stock Exchange Index had its biggest loss since January. Shares also declined in Russia, South Africa and Turkey, while benchmarks in Argentina, Mexico and Brazil plunged more than 3 percent in the last session.

The Shanghai Composite Index gained 0.8 percent, taking the advance from its Jan. 28 low to more than 20 percent. This quarter’s rally has been led by commodity producers and construction companies as the government boosts spending to bolster growth, driving raw-materials prices higher amid a clampdown on speculation in the housing market. Friday is Singles Day, the Chinese e-commerce event that has morphed into the biggest online shopping event in the world.

"Liquidity is abundant and property curbs will prompt more money to flow into stocks, which look undervalued relative to homes in large cities," said Li Jingyuan, general manager at Shanghai Bingsheng Asset Management.

The Stoxx Europe 600 Index added 0.5 percent, headed for its biggest weekly jump since February. Allianz SE jumped by the most in eight months after Europe’s biggest insurer reported a 36 percent increase in third-quarter profit. PostNL NV slide more than 6 percent after rejecting a 2.5 billion-euro ($2.7 billion) takeover offer from Bpost SA.

S&P 500 Index futures were little changed, after the underlying benchmark capped a 4 percent weekly advance, its best performance in two years, ahead of a U.S. holiday on Friday.

Currencies

The MSCI Emerging Markets Currency Index fell 0.6 percent. Indonesia’s rupiah and South Korea’s won sank more than 1 percent versus the dollar to their weakest levels in more than four months. China’s yuan was set for its steepest weekly drop since January.

“Rising U.S. yields will cause volatility in capital flows into emerging markets, and with the Fed still likely to hike rates in December, the risk is for further outflows,” said Khoon Goh, head of Asian research at Australia & New Zealand Banking Group Ltd. in Singapore. Trump’s plans to revisit trade agreements is “is also a factor,” he said.

Malaysia’s ringgit slipped to its lowest level since January, prompting the central bank to say it may intervene at times of extreme volatility. The nation’s economy expanded in the last quarter by more than analysts forecast, data showed Friday.

Latin American currencies tumbled Thursday on concern Trump’s administration could usher in a host of protectionist measures after he campaigned on a pledge to protect U.S. workers and companies from unfair trade deals. A trade war would be a blow to economies such as Mexico, which gets 80 percent of its overseas sales from the U.S. and has seen its currency plunge more than 8 percent this week.

The Bloomberg Dollar Spot Index climbed 2.5 percent this week, the best performance since May 2015. The yen lost 3.4 percent and the euro slid 2.2 percent.

“The dollar is up against most major currencies supported by an upward revision to U.S. interest expectations and focus on President-Elect Donald Trump’s pro-growth and inflationary economic policies,” said Elias Haddad, a senior currency strategist at Commonwealth Bank of Australia. “Trump’s economic policies will force the Fed to raise the Funds rate at a faster pace than otherwise, which is dollar bullish.”

Bonds

The global debt selloff extended into Friday, with yields on 10-year Australian government bonds surging seven basis points to 2.57 percent, the highest since May. Similar-maturity notes in Germany fell for a fifth day and yielded 0.34 percent.

Yields on U.S. 30-year bonds, which are more sensitive than shorter maturities to the outlook for inflation, have jumped almost 40 basis points since last Friday and a $15 billion auction of the tenor on Thursday showed waning appetite for the securities. The Bloomberg Barclays U.S. Treasury Index slid 1.85 percent this week, its biggest loss since 2009.

“We do view the election of Donald Trump as a game changer,” said Adam Donaldson, head of debt research at Sydney-based Commonwealth Bank of Australia. “The strong bias toward fiscal expansion and inflationary policy represents a stark change to the malaise of recent years. This opens the door for the Fed to hike in December, but also more quickly in 2017 and 2018 than previously expected.”

The market value of Bank of America’s Global Broad Market Index, which tracks more than 24,000 bonds around the world, has declined by $1.14 trillion this week to $48.1 trillion. The only previous week it fell more than $1 trillion was in June 2013, when the Fed was threatening to reduce debt purchases and triggered a bond selloff that became known as the "Taper Tantrum."

Commodities

A Bloomberg gauge of industrial metals jumped more than 10 percent this week, the most in data going back to 1991, on optimism Chinese demand will firm at the same time as Trump steps up spending on U.S. infrastructure. Zinc is the highest it’s been since 2011 in London, while copper, aluminum and nickel are at their best levels in more than a year.

Gold lost 3.9 percent this week amid expectations inflation and interest rates are headed higher in the U.S. under a Trump administration. Fed Bank of St. Louis President James Bullard on Thursday signaled a December rate increase is likely.

Crude oil fell 0.8 percent on Friday to a one-week low of $44.33 a barrel in New York. Prices may retreat amid “relentless global supply growth” unless the Organization of Petroleum Exporting Countries enacts significant output cuts, the International Energy Agency said Thursday. The group failed last month to agree on quotas for member countries, something that must be done if proposed reductions are to be finalized at a meeting on Nov. 30.

Palm oil jumped as much as 6.7 percent to the highest level since 2012 in Kuala Lumpur, buoyed by the weaker ringgit and falling output. Rubber rose to its highest intraday level since April in Tokyo, having jumped 16 percent this week amid speculation Trump’s policies will boost car sales in the U.S.

Source : Bloomberg