EM Assets Rebound as US Yields Cool After Hot Jobs Data Report

Emerging-market currencies rebounded, edging higher along with developing stocks as a slump sparked by a stronger-than-expected US jobs report early on Friday faded.

(Bloomberg) — Emerging-market currencies rebounded, edging higher along with developing stocks as a slump sparked by a stronger-than-expected US jobs report early on Friday faded. 

A gauge for emerging-market currencies rose as much as 0.3%, while its counterpart for stocks climbed 1% as global markets recovered. Yields on 10-year and 30-year Treasuries calmed after touching 2007 highs near 4.9% and 5.1%, respectively, as traders fretted over the view that global interest rates could remain higher for longer. 

The South African rand led gains, climbing more than 1% versus the dollar. Currencies in Mexico and Colombia reversed earlier losses to end the day higher, while the Chilean peso continued to weaken. The improving mood helped lift benchmark stock gauges in Brazil and Mexico — where equities reversed steep losses seen at open to close 0.4% higher. 

Read more: US Hiring Surges, Bolstering Case for Another Fed Rate Hike

“EM rebound rallies should be short lived in this environment until we get a clearer ceiling in US yields,” said Alejandro Cuadrado, the global head of FX & Latam strategy at BBVA. “Until then, there’s been a lot of damage, and there’s still plenty of uncertainty with very limited directional conviction and high correlations with US yields.”

Investors hoping for a fourth quarter rebound in EM assets have seen those expectations dwindle this week, with fresh causes for concern arising from North Africa to Latin America. 

A gauge of returns from carry trades in 18 major developing-nation currencies showed the worst losses since China ended its Covid Zero policy. 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.

Read more: BlackRock’s ETF Is Outsized Loser in Emerging-Market Selloff

Latin American currencies struggled this week amid the sour mood with emerging markets and a myriad of local woes. The Mexican government’s tweaks to its airports tariff policy, which shocked the stock market, spilled over into the peso as investors worried about growing intervention. While an earlier spike in oil prices boosted concerns over resurgent inflation and sparked a selloff in risk assets, this week’s drop in crude futures contributed to losses in currencies such as the Colombian peso.  

“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 surge in US yields is hitting 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 equities. Bond yields would cap a third year of increases, also the longest streak since 2015.

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.

Read More: Egyptian Bonds Plunge After Moody’s Downgrade to ‘CCC’ Level

Panama’s debt also tumbled this week, approaching its lowest level in 14 years on mounting speculation that the Central American nation is heading for a downgrade.

Investors began betting that Ethiopia could 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.

–With assistance from Leda Alvim, Carolina Wilson and Davison Santana.

(Updates pricing throughout)

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