Emerging Markets Plunge as Trump Policy Risk Worsens Sentiment

(Bloomberg) -- Emerging-market bonds extended a rout and stocks fell to four-month lows as investors dumped higher-yielding assets on speculation Donald Trump’s spending plans may push up U.S. inflation and interest rates.

Ten-year sovereign notes in Russia fell for a third day, pushing yields to the highest since June. The rate on similar-maturity Turkish debt rose to the highest in nine months. Investors turned the most bearish in three months on developing-nation debt. Stock volatility surged as benchmark indexes in Brazil, India and South Africa each fell more than 2 percent. Mexico’s peso fell to a deeper record low. Central banks in Indonesia and India were said to intervene to support their exchange rates.

Local-currency bonds in emerging markets posted a sixth weekly, the longest losing streak on record, as investors speculate that Trump will add stimulus that will hasten inflation and lead to more frequent Federal Reserve interest-rate increases. Futures indicate an 84 percent probability of a move next month and expectations are rising for further increases. The bearish outlook for bonds pulled down currencies, and echoed in the equity market, where investors have withdrawn $172 billion this month.

“We may be entering a prolonged period of volatility as nobody really knows what’s going to happen,” said Nathan Griffiths, who helps oversee about $1.1 billion as a senior money manager at NN Investment Partners in The Hague. “If Mr. Trump’s spending plan leads to faster growth and thereby faster inflation, it would be negative for bonds. If his tax cuts pressure the fiscal position of the U.S., that would be negative too.”

The MSCI Emerging Markets Index declined 2.9 percent to 850.70. The gauge has gained 7.1 percent this year and trades at 11.7 times projected earnings of its members. A measure of developing-nation exchange rates fell 1 percent, reducing its 2016 advance to 3.3 percent.

Standout Moves

* Turkish 10-year yields jumped 24 basis points, taking the increase this week to 47 basis points.

* Rates on similar-maturity Russian notes jumped 23 basis points on Friday, and 46 points in the past three days.

* The premium investors demand to own developing-nation government bonds over U.S. Treasuries widened seven basis points to 356, the highest since Aug. 4, according to JPMorgan Chase & Co. indexes.

* Mexico’s peso fell 0.8 percent. The currency has lost 10 percent in the past three days on concern Trump may renegotiate or abandon the nation’s trade deal with the U.S.

* Indonesia’s rupiah fell 0.9 percent as some traders stepped up hedging via non-deliverable forwards. The monetary authority was in the market to stabilize the rupiah, said Nanang Hendarsah, head of financial market deepening at Bank Indonesia.

* Ukraine’s Eurobonds maturing in 2019 fell for a third day, pushing the yield up 157 basis points this week, the biggest since new notes were issued in a restructuring last year

A U.S. exchange-traded fund with $28 billion of assets witnessed the biggest single-day outflows since January 2011, according to data compiled by Bloomberg. Investors withdrew $1.57 billion from the iShares MSCI Emerging Markets ETF on Thursday. At the same time, the Vanguard FTSE Emerging Markets ETF, which manages about $45 billion, received $182 million of new deposits.

--With assistance from Jung Park Kartik Goyal and Harry Suhartono To contact the reporters on this story: Srinivasan Sivabalan in London at ssivabalan@bloomberg.net, Liau Y-Sing in Kuala Lumpur at yliau@bloomberg.net, Anuchit Nguyen in Bangkok at anguyen@bloomberg.net. To contact the editors responsible for this story: Daliah Merzaban at dmerzaban@bloomberg.net, Srinivasan Sivabalan, Richard Richtmyer

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