Trade Angst Hits Emerging Stocks With $8 Trillion in Bear Market

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Stocks in developing nations slumped as heightened concern that a trade war will sap global economic growth put equity gauges worth $8 trillion in a bear market. Currencies also retreated and are heading toward their worst month since November 2016.

The MSCI Emerging Markets Index sank to the lowest in 10 months, while 16 out of 24 currencies tracked by Bloomberg fell. The Shanghai Composite Index has tumbled 20 percent from its peak in January, with China joining nations such as Turkey and Pakistan in crossing that threshold. The risk premium on sovereign bonds over U.S. Treasuries widened.

Investors awaited more clarity from the White House on its plans as National Trade Council Director Peter Navarro contradicted comments from the Treasury regarding Chinese investment in the U.S., while President Xi Jinping reportedly said he will strike back. In addition to tension between the world’s two biggest economies, traders are assessing a scenario of accelerated tightening by the Federal Reserve and impact of higher oil prices.

“This is a dangerous market,” said Jonathan Garner, Morgan Stanley’s chief Asia and emerging markets strategist. “We now think we’re heading to an outright bear market.”

The Worst Hit

Stock markets worth a combined $8 trillion are in bear territory

Source: Bloomberg

Note: Bear market = 20% drop from bull-market peak; pullback after a 20% drop is still considered a bear market

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HIGHLIGHTS:
MSCI Emerging Markets Index fell 0.4 percent to 1,066.63
Stock measure has dropped 16 percent from January peak
Vanguard FTSE Emerging Markets ETF declined to 11-month low
Risk premium on EM sovereigns +2bps to 363bps: JPMorgan indexes

ANALYSIS:

From Turkey to China, Bear Markets Spread Across Emerging WorldMSCI’s EM Currency Index Is at Critical Juncture, Rabobank SaysAllianz Says Emerging Markets ‘Might Get Hurt’ as Dollar Climbs

LATAM:

ARGENTINA:Merval Index decreased 0.4 percent to 28,705.90Peso fell 0.1 percent to 27.10 per dollarNation will probably keep interest rates on hold at 40 percent on Tuesday, according to analysts in a Bloomberg survey"I still don’t think we can say the currency tension episode has ended. It would be a bad signal for market expectations if the new administration debuted with an interest rate cut," said Gabriel Zelpo, chief economist at ElypsisTCW Group’s Mauro Roca said it’s difficult to call peso overvaluedBRAZIL:Ibovespa declined 0.7 percent to 70,465.50Real dipped less than 0.05 percent to 3.78 per dollar10-year local-bond yield dipped 12 basis points to 11.86 percentCentral bank said uncertain scenario was main reason for them to avoid clearly signaling next rate movesMorgan Stanley raised Brazilian mall stocks to overweightSupreme Court Minister Edson Fachin, who canceled trial of ex-president Luiz Inacio Lula da Silva’s appeal previously scheduled for this week, sent case to be debated on Court floorFormer finance minister Henrique Meirelles said he’s willing to self-finance his campaign for presidentMEXICO:Mexbol index fell 0.2 percent to 46,652.06Peso climbed 0.4 percent to 19.8177 per dollar, strongest in almost four weeks10-year local-bond yield declined seven basis points to 7.697 percentAlfonso Romo, economic adviser to presidential frontrunner Andres Manuel Lopez Obrador, told Reuters the peso is undervalued and promised to strengthen itTrading volumes are above average while liquidity conditions slightly worse than average, which may exaggerate price moves as short MXN positions unwind, according to NY-based tradersClick for market news on ANDES

EMEA:

TURKEY:Borsa Istanbul 100 Index increased 0.4 percent to 94,347.75Turkish lira gained 1.2 percent to 4.6268 per dollarVeteran investor Mark Mobius recommends buying lira as "a weak currency is not necessarily a bad thing"Moody’s said recent policies by Erdogan administration have “heightened Turkish corporates’ and banks’ exposure to currency depreciation and the economy’s exposure to the widening current account deficit”Nomura economist Inan Demir said election outcome doesn’t solve most important question for Turkish economy: "how to avoid a hard landing”RUSSIA:MOEX Russia Index declined 0.1 percent to 2,234.51Ruble dipped 0.8 percent to 63.2625 per dollar10-year local-bond yield rose 10 basis points to 7.75 percentInterfax reports government may borrow up to $3 billion externallyShort-term outlook “mixed” for ruble with OPEC raising output positive and trade war tensions a “spoiler,” said Igor Rapokhin, an analyst at BCS brokerageRecord-low inflation set to surge higher next year, according to Bloomberg IntelligenceSOUTH AFRICA:FTSE/JSE Africa All Share Index sank 0.8 percent to 49,295.30, lowest in almost four weeksRand gained 0.1 percent to 13.536 per dollar9-year local-bond yield fell three basis points to 8.884 percent Fear is that full-blown trade war will nudge U.S. economy into a recession and leave South African markets vulnerable amid flight to safe-haven assets, said FirstRand Bank fixed-income trader Michelle WohlbergMoody’s says move to change constitution to allow expropriation without compensation could deter investmentInflation set to accelerate on food costs in the second half of 2018, according to Bloomberg IntelligenceClick for market news on POLAND and HUNGARY

ASIA:

CHINA:Shanghai Composite Index sank 0.5 percent to 2,844.51, lowest in about two yearsOffshore yuan dipped 0.7 percent to 6.5876 per dollar, weakest in about six months 10-year local-bond yield dropped one basis point to 3.585 percent Benchmark equity gauge entered a bear market amid growing concern about the country’s resilience to a trade warChina Stock Rout May Worsen, Analysts Warn No End in SightPresident Xi Jinping told a group of U.S. and European CEOs that he will strike back at U.S. trade measures, the Wall Street Journal reportedFinance Ministry says it plans to sell 5 billion yuan bonds in Hong Kong "soon"INDIA:Sensex Index increased 0.1 percent to 35,490.04Rupee decreased 0.2 percent to 68.251 per dollar10-year local-bond yield fell one basis point to 7.8286 percent While rising trade tensions weigh on sentiment, India should outperform as oil prices stabilize and domestic flows remain strong, said Sunil Sharma, CIO at Sanctum Wealth ManagementPrime Minister Narendra Modi said government is firmly committed to path of fiscal consolidationMacro-stress tests indicate the gross bad loan ratio of Indian banks may rise to 12.2 percent by March 2019 from 11.6 percent year ago, according to RBI’s Financial Stability ReportTraders are awaiting a decision on farm support prices to gauge inflation outlookClick for more on markets in ASIA

— With assistance by Srinivasan Sivabalan, and Michelle Jamrisko

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