EM : Strong dollar, higher U.S. yields make stocks, currencies suffer

A surging dollar and rising U.S. Treasury yields weighed on emerging market assets on Monday, with Mexico’s peso once again leading the falls across currencies while stock markets chalked up solid losses.

The dollar, which is at its strongest in nearly a year, has been roaring higher since Republican Donald Trump won the U.S. presidential election on Nov. 8. That triggered a massive sell-off in Treasuries, with investors expecting Trump’s policies to ramp up domestic inflation.

MSCI’s emerging market equity index slipped nearly 1 percent on the day and has tumbled nearly 7 percent since the U.S. election. Markets in Asia tallied up heavy losses and stocks in Turkey and Russia fell around 0.8 percent.

The most widely used emerging market hard-currency bond index, JPMorgan’s EMBI Global Diversified Index, showed the premium investors demanded over U.S. Treasuries widened 4 basis points. The index has risen nearly 20 basis points since the U.S. election.

Currencies also weakened. The Mexican peso, which has become a lightning rod for market anxiety, slipped 1.5 percent against the dollar. Russia’s rouble and the Turkish lira traded 1 percent weaker.

“The general gist is that investors are trying to figure what he is going to do as president,” said Cristian Maggio, head of emerging markets strategy at TD Securities. “No one has a clear answer to that question. We don’t expect all his pledges to be implemented.”

Asian currencies fared little better. Malaysia’s ringgit traded near 10-month lows and China’s yuan slipped 0.5 percent after the central bank dropped the trading midpoint to its weakest rate since September 2009.

Meanwhile, a raft of data pointed to a stabilisation in the world’s second largest economy, though there were some clouds ahead. Fixed-asset investment quickened slightly and beat expectations in January-October as the government stepped up infrastructure spending to support growth.

“China’s economy is at risk with his election, in particular that (Trump) would want to label China a currency manipulator,” TD Securities’ Maggio said. “This is going to add strains to trade and diplomatic relations.”

Egypt’s pound proved the exception, strengthening around 1 percent to just over 15 to the dollar after Cairo won International Monetary Fund approval late on Friday for a three-year, $ 12 billion bailout program aimed at reviving a struggling economy, bringing down public debt and controlling inflation.

Across central and eastern Europe, currencies hovered broadly flat against the euro after having traded near or at multi-month lows on Friday.