Emerging Markets Set for ‘Wild Ride’ on Moves in Dollar and Oil

Developing-world currencies and stocks weakened as renewed dollar strength and elevated oil prices hurt sentiment for riskier emerging assets.

(Bloomberg) — Developing-world currencies and stocks weakened as renewed dollar strength and elevated oil prices hurt sentiment for riskier emerging assets.

MSCI Inc.’s gauge of developing equities fell as much as 0.5%, extending its decline to a second day, while the currencies dropped to the lowest in over two weeks. Volatility across emerging markets have prompted Barclays PLC to predict a “wild ride” in local markets.

“We argued in our previous quarterly that EM was following its own path; but the recent move in US rates raises questions on how much they can diverge,” Barclays strategists led by Christian Keller wrote in a note dated Wednesday. “China’s woes and the US term premia shock sent EM assets on a roller-coaster and make for a challenging backdrop for EM flows,” while the upward shift in oil prices “has become hard to ignore.”  

Deutsche Bank also announced a bearish outlook for emerging currencies. 

“The market’s view of the EM outlook has turned increasingly bearish and not just due to China,” Oliver Harvey, a macro strategist at the bank, said in a note. “The largest downward revisions to the EM growth complex over the last month have come from South Asia” and central and eastern Europe.

Poland’s currency and stocks got hammered Wednesday after the country’s central bank delivered an unexpectedly steep interest rate cut in a bid to boost a slowing economy, even as inflation remains above 10%. The zloty was the worst-performing emerging-market currency, slumping as much as 2.3% against the dollar, the most in nearly a year. Warsaw’s benchmark WIG20 stock index slid 2.4% to the lowest since June.

Read More: Polish Stocks Drop Most in the World as Rate Cut Pummels Banks

The Mexican peso weakened for a fifth day and was headed for its longest losing streak since May. Underperformance in the peso has been a rare this year as it’s widely seen as a top choice among carry traders. It’s the second top gainer in 2023 after Colombia’s peso. 

The advance in the US dollar has sent Asian currencies to multi-month lows, while prompting authorities in Japan and China to step up defenses of their exchange rates. The Chinese central bank supported the yuan by setting the daily reference rate for the currency at the strongest bias versus estimates in a Bloomberg survey.

Read More: China’s Distressed Developers Soar in Wave of Speculative Buying

Elsewhere, Fitch Ratings placed Gabon’s credit rating on negative watch, citing high political uncertainty following the military coup on Aug. 30, sparking a selloff in its bonds. Separately, Goldman Sachs said the significant repricing of risk for Gabon’s dollar bonds has spilled over to the debt of its regional peers.

Brent Crude reversed earlier losses and is trading 0.8% higher at $91 a barrel. Worst affected by the surge in fuel prices will be the poorest emerging markets “where fuel purchases are a high portion of household consumption, like India in large EM and Jordan, Kenya, Morocco, Pakistan, Philippines,” said Hasnain Malik from Tellimer. 

(Updates with new price moves on Brent Crude in the last paragraph.)

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