(Bloomberg) -- The brutal tumble of Argentina’s peso added to the list of concerns over the ability of developing economies to defend their currencies as the era of cheap money wanes. Emerging-market assets extended losses a day after the Federal Reserve’s more hawkish signals.
A measure of currencies in developing nations dropped to a seven-month low, while every group in the MSCI Emerging Markets Index fell -- led by industrial, commodity and technology companies. The Argentine peso sank more than 6 percent on reports of changes at the country’s central bank and after truck drivers began a strike. The Brazilian real -- dropped a fourth day as the impact of a massive sale of foreign-exchange swaps was short lived.
Developing-nation assets took a beating as signals of a slightly more aggressive pace of Fed hikes added to concern over further currency depreciation in developing economies. Meanwhile, the European Central Bank said a rate increase won’t come until the summer of 2019, though it announced it would end stimulus in December, setting the euro area up for an exit from years of massive monetary support.
COMMENTS:
- History suggests another leg down in the Brazilian real, South African rand or Mexican peso would “tip the balance towards policy tightening” in those nations, according to Capital Economics
- History suggests central banks raise rates when currency falls more than 10% within two months and inflation is running above target and/or is on a rising trend
- Economists analyzed 12 cases of EM tightening amid FX weakness since 2013
- Argentine peso could overshoot and hit "stratospheric" lows without intervention, according to Alejandro Cuadrado, the global head of foreign exchange at BBVA (MC:BBVA).
- “We are still very much flow dependent. And the ARS is quite naked"
- “The market knows the central bank allows itself to get deeply behind the curve, and is merely acting rationally by selling the real and shorting bonds," said James Gulbrandsen, a Rio de Janeiro-based money manager who helps oversee $3.5 billion of assets at NCH Capital. “This is economics 101. If you suppress prices, you create market distortions and arbitrage. And the market always wins”
HIGHLIGHTS:
- MSCI Emerging Markets Index declined 1.2 percent to 1,122.26
- CBOE Emerging Markets ETF Volatility Index dipped 1.1 percent
- MSCI EM Currency Index had the largest drop in a month
LATAM:
- ARGENTINA:
- Declines in the currency accelerated after Argentine columnist Marcelo Bonellire ported that three central bank directors would be resigning from their posts soon. The central bank declined to comment
- In another setback for President Mauricio Macri, truck drivers went on a nationwide strike as other labor unions have threatened to join the stoppage
- Banks Lead Argentina Losses as Peso Falls to Record Lows
- As Argentine Peso Craters, Stock Pickers Pin Hope on Upgrade
- BRAZIL:
- Real Extends Decline Even After BCB’s Record Intervention
- Brazil Sells All 20,000 FX Swaps Offered in 3nd Extra Auction
- Brazil’s FX Intervention Pledge Questioned After Rate Surprise
- It is difficult to justify a Selic hike in Brazil at next week’s policy meeting as currency is close to the level it was seen at the previous decision, when traders were looking for a rate cut: MRJ Marejo
- MEXICO:
- Mexico’s peso looks set for more pain as the country’s presidential vote approaches, according to a technical indicator
- Mexico’s Obrador Will Work to Calm Markets, Campaign Chief Says
- Nafta Talks to Continue Through Summer in Push For Deal: Canada
- Winning on Peso Volatility Requires Getting the Price Right
- Click for market news on ANDES
EMEA:
- TURKEY:
- Turkey Cenbank Expects Pressure on Inflation to Continue in June
- Turkey Elections ‘Expected to Have Unstable Outcome’: ABN Amro
- Erdogan: Turkey to Conduct an Operation Against Moody’s
- SOUTH AFRICA:
- South Africa Spells Out Case Against Suspended Tax Chief
- S. Africa’s Eskom Starts Blackouts as Protests Disrupt Plants
- RUSSIA:
- Exactly half of the 42 economists surveyed by Bloomberg predict the key rate will stay at 7.25 percent, while the rest say the central bank will come down in favor of a cut to bring the benchmark to the 7 percent top end of the neutral band
- Russia on Cusp of Rate Threshold Will Think Twice About Next Cut
- Russia Plans to Raise Retirement Age, Increase Value-Added Tax
- Click for market news on POLAND and HUNGARY
ASIA:
- CHINA:
- The unexpected move by the PBOC to keep borrowing costs is a sign of confidence the yuan can withstand pressure, according to analysts
- "It appears that the PBOC holds strong confidence on yuan stability and even a symbolic hike in reverse repo yield is not needed," Mizuho Bank senior currency strategist Ken Cheung wrote
- Trump Says He May Upset China on Trade as U.S. Tariffs Loom
- INDIA:
- India’s wholesale price inflation accelerated to the highest in 14 months in May, underpinning a view that price pressures were growing and could push the central bank to further tighten policy
- Nomura Says Intervention Can Snap India Bonds’ Vicious Cycle
- India Inc. Sells Record Debt to Savers Amid Tight Credit
- Click for more on markets in ASIA