Rising trade-war clamor batters emerging markets as rand tumbles

Emerging markets were left reeling as the US ratcheted up the rhetoric in its trade war with China, driving all but one of the major currencies lower and sending stocks to their biggest loss since March.

The rand weakened the most among peers, falling to a November low, as sovereign yield spreads blew out an average of nine basis points versus Treasuries and the Shanghai Composite, re-opening after Monday’s holiday, plunged almost 5%.

Investors are turning against emerging markets as the rising prospect of a prolonged trade war compounds the impact of a more hawkish Federal Reserve and European Central Bank, a strengthening dollar and political risks escalating across Europe. Currency crises in Turkey and Argentina in recent weeks have also soured sentiment.

“If it’s not Turkey, it’s Italy and if it’s not Italy then it’s the trade wars,” Gordon Kerr, a fixed-income trader at Firstrand Bank Ltd. in Johannesburg, said in a client note. “There seems to be reason after reason for emerging markets to sell off.”

A Bloomberg currency index that measures carry-trade returns from eight emerging markets, funded by short positions in the dollar, has slumped 8.9% since end-March, set for its biggest quarterly loss since 2011. After rallying in the five quarters through March this year, what’s turned the strategy on its ear is the dollar’s recovery toward an 11-month high.

Rand Sinks

The rand’s plunge was exacerbated as Japanese retail investors unwound long positions, turning to the safety of the yen, according to Mizuho Bank. Net long positions held by Japanese individuals in the rand against the yen were at the highest since 2016 in the week ended June 12, according to data from the Tokyo Financial Exchange.

“It doesn’t seem like any domestic factor is behind the sell-off, but more to do with an overall risk-off sentiment,” said Yasuhiro Nakamura, an emerging-market currency trader in Tokyo at Mizuho.

The rand weakened 1.7% to 13.8753 per dollar at 1:04 pm in Johannesburg, and slumped more than 2% against the yen. Still, demand at South Africa’s weekly government bond auction rose on Tuesday, with the Treasury selling R2.4 billion ($173 million) of fixed-rate securities.

Nothing’s Immune

A surge in ETF withdrawals is starting to undermine the view that the emerging market sell-off is largely limited to the weakest economies.

Outflows from US-listed exchange-traded funds that invest across developing nations as well as those that target specific countries totaled $2.7 billion in the week ended June 15, the most in over a year and more than seven times the previous week, according to data compiled by Bloomberg.

South Korea and Thailand, which have current-account surpluses, are among the eight worst emerging currencies this month.

Highlights from across emerging markets:

MSCI’s emerging markets index dropped as much as 2.1%, putting its 14-day relative strength index on course for its first close below 30 since February Russia’s ruble fell 0.9% against the dollar.

Bank of Russia’s bond auction scheduled for this afternoon Gazprombank delays sale of ruble bonds, citing market conditions Turkish lira dropped 1.3%, and the yield on 10-year government debt climbed above 17% for the first time. Uncertainty over the direction of policy after the vote on Sunday, and the risk of prolonged political instability if there’s no clear winner in the first round are also weighing on sentiment

The Shanghai Composite Index plummeted to 2871.355, the lowest level in two years Hungary’s forint extended losses against the euro, moving closer toward the weakest level on record, as the nation’s central bankers met to discuss policy. The National Bank of Hungary will likely hold rates later today, with investors looking for signs on the future of the unconventional easing measures that contributed to Hungary’s underperformance.