Emerging-Market Stocks Deepen Rout Ahead of Fed, US Election

(Bloomberg) -- A gauge for emerging-market stocks fell for a second day and Latin American currencies extended losses with traders shedding risk ahead of next week’s US election and Federal Reserve meeting.

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The MSCI’s benchmark index for emerging stocks slid 0.9% on a closing basis, and is headed for the biggest monthly loss since January. The index was dragged down by Asian equities, amid losses in China and Hong Kong stocks.

While a companion gauge for emerging currencies advanced 0.1%, Latin American currencies slumped as markets continued to position for a potential win by Donald Trump in the US election. A Trump win may be seen as risky for emerging-market assets, as he has pledged to raise import tariffs. Still, most polls show a tight contest between Trump and Vice President Kamala Harris.

The continued increase in volatility and traders loading up on dollar positions may push Latin American currencies to new yearly lows, said Alejandro Cuadrado, strategist at BBVA. That’s “a trend unlikely to be reversed until at least we get clarity on the US result,” he said.

On Wednesday, the Chilean peso was the worst performing currency among emerging-market peers. Earlier, Mexico’s peso slumped to the lowest level in over two years amid jitters ahead of the US presidential election next week.

Mexican assets could experience a “perfect storm,” if Trump returns to the White House at the same time that domestic reforms continue to worsen, according to UBS.

“A Trump victory poses heightened risks for Mexico. Potential tariffs, a more protectionist stance, and tougher immigration policies could weaken investor confidence and trigger weakness in Mexican financial assets,” analysts led by Alejo Czerwonko wrote in a note to clients.

The Brazilian real pared losses, bolstered by signs that Brazil’s government is moving closer to approving a much awaited austerity plan. Earlier, Finance Minister Fernando Haddad said there’s growing consensus in the government about the need to strengthen the country’s fiscal framework.

US Drivers

Traders continued to track high-profile data reports this week, as they prepare for the Fed’s meeting next week. Earlier on Wednesday, data showed hiring at US companies rising by the most in more than a year, pointing to surprisingly solid demand for workers ahead of the all-important jobs report on Friday.

Also, inflation-adjusted gross domestic product increased at a 2.8% annualized after rising 3% in the previous quarter, powered by the resilient consumer. Traders slightly trimmed bets on rate cuts after the data reports.

Emerging-market investors are also bracing for volatility ahead of the US election next week. Inflation expectations are likely to rise regardless of the outcome of the vote, according to RBC Capital Markets.

“The three main themes in the candidates’ discussions are immigration, tariffs, and fiscal policy. Although multiple scenarios exist, the most likely outcomes point toward increased inflation,” strategist Luis Estrada wrote in a note.“This poses a risk that the Federal Reserve may under-deliver on current easing expectations. Ultimately, this means higher funding costs for emerging markets.”

Meanwhile, some are turning to Asian sovereign bonds to ride out the US election. Asset managers such as Allianz Global Investors, Franklin Templeton and Gama Asset Management say they’re bullish on government debt in Asia ex-China. Expectations of interest-rate cuts have buoyed demand, and they say those bonds will be safe havens in the event of market jitters around the vote.

Elsewhere, the Czech economy expanded less than expected in the third quarter as household consumption continued to recover but exports remained weak. Hungary’s economy unexpectedly entered a recession in the third quarter as domestic consumption failed to make up for a deep downturn in industrial production.

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