LONDON: Emerging equities dipped to a 10-month low on Tuesday, tracking moves in developed markets after the bitter trade row between the U.S. and its key trading partners ratcheted up a notch, while China’s yuan and Turkey’s lira led the currency losses.
MSCI’s benchmark emerging stocks index fell 0.2 percent to its lowest since August 2017 after Wall Street’s worst day in two months as investors fretted about the growth impact of increased protectionism.
The latest sell off in global equities followed reports the U.S. is drafting curbs to block firms with at least 25 percent Chinese ownership from buying U.S. tech companies.
Conflicting signals from the Trump administration added fuel to the fire, with U.S. Treasury Secretary Steven Mnuchin saying the proposed restrictions would not just be confined to China.
William Jackson, senior emerging market economist at Capital Economics, said investors were concerned about the direct impact of the measures already announced, and how the dispute might escalate.
“We’ve seen threats about U.S. tariffs on car imports, for example, which raises questions about what will happen with the NAFTA talks and whether there is any hope of a deal – so it increases uncertainty as to how events will develop,” he said.
The next meeting of ministers from Mexico, Canada and the United States on efforts to rework the North American Free Trade Agreement (NAFTA) is expected in July.
Chinese mainland shares led the losses, down almost 1 percent to one-year lows, with tech-heavy Taiwan also down 0.4 percent and Hong Kong down 0.3 percent. China’s yuan slumped 0.36 percent to a six-month low.
Depreciation of the currency will help offset some of the hit to the competitiveness of Chinese exports taken as a result of tariffs imposed by the United States.
Bahrain assets came under heavy selling pressure as investors worried about the country’s ability to avoid a funding crunch. Sovereign dollar bonds fell to record lows, and five-year credit default swaps spiked to a record high of 543 basis points according to IHS Markit data.
One-year dollar-dinar forwards rose to 407.6 points, the highest since September 2016.
Other emerging market currencies also sold off, with Turkey’s lira weakening as much as 0.5 percent after bouncing on Monday in the immediate aftermath of a presidential and parliamentary election win giving Tayyip Erdogan sweeping executive powers.
Investors remain concerned about the future course of monetary and fiscal policy under Erdogan, with the central bank still seen as behind the curve in tackling double-digit inflation despite recent rate hikes.
“The drivers of the weakness of the lira – the large current account deficit, the high inflation and unanchored expectations are still in place,” said Jackson.
Turkey’s 10-year benchmark local currency bond yield rose to 17.51 percent from Monday’s close of 16.92 percent.
The South African rand also weakened 0.26 percent and Mexico’s peso fell 0.4 percent.
Emerging Europe held up better in the general sell off, with both Poland and Hungary shares up 0.5 percent, whilst the Polish zloty also firmed 0.2 percent against the euro.