Emerging Stocks Drop, Currencies Trim Gains on Fed, US Data
(Bloomberg) -- Emerging-market stocks declined and currencies trimmed gains as hawkish remarks from Federal Reserve officials and stronger-than-expected US consumer confidence hurt risk appetite.
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The MSCI EM currency index trimmed gains to close less than 0.1% higher, while a similar gauge tracking developing-nation equities fell as much as 0.3% as Fed official Neel Kashkari said an interest rate increase isn’t off the table. US consumer sentiment also rose for the first time in four months.
While the fresh signals US rates will remain higher for longer weighed on risk assets, most emerging market currencies ended the day with gains. The Colombian and Chilean pesos were among the top performers on Tuesday.
The rand also outperformed, along with South African sovereign bonds, ahead of Wednesday’s general election. The nation’s notes offer some of the highest yields in emerging markets with those on 10-year bonds exceeding 12%. Investors have been betting that local assets will rise after the vote as record-hitting commodity prices boost the exports that South Africa’s economy relies on.
“South Africa’s general and presidential contest in May could have more significant implications for emerging market debt investors,” said Damien Buchet, chief investment officer at Finisterre Capital. “This could be the first time since the end of Apartheid where the African National Congress party loses its absolute majority.”
In addition to South Africa, investors are also looking ahead to votes in Mexico and India. Vote-counting in India is due to be wrapping up on June 4, while the presidential election in Mexico is set to take place on Sunday.
The Indian rupee slid for a second day, underperforming peers on likely dollar buying by importers and central bank intervention to absorb bond-related foreign inflows. The Mexican peso was the worst-performing developing currency Tuesday, dropping to the weakest in nearly two weeks and trimming its year-to-date gains that make it the best-performing major currency in 2024.
“We do not see much post-electoral risk, but it is normal to see some positioning in the face of risk scenarios, especially considering the accumulated outperformance of the peso,” said Claudia Ceja, a strategist at BBVA Mexico.
--With assistance from Michael O'Boyle.
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