Emerging Markets Set for ‘Wild Ride’ on Moves in Dollar and Oil

(Bloomberg) -- Developing-world currencies and stocks weakened as renewed dollar strength and elevated oil prices hurt sentiment for riskier emerging assets, prompting Barclays PLC to predict a “wild ride” across local markets.

MSCI Inc.'s gauge of developing equities fell as much as 0.5%, extending its decline to a second day, while the currencies edged lower. Mexico's peso, Russia's ruble and Malaysia's ringgit led declines. 

The advance in the US dollar has sent Asian currencies to multi-month lows, while prompting authorities in Japan and China to step up defenses of their exchange rates. The Chinese central bank supported the yuan by setting the daily reference rate for the currency at the strongest bias versus estimates in a Bloomberg survey.

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“We argued in our previous quarterly that EM was following its own path; but the recent move in US rates raises questions on how much they can diverge,” Barclays strategists led by Christian Keller wrote in a note dated Wednesday. “China's woes and the US term premia shock sent EM assets on a roller-coaster and make for a challenging backdrop for EM flows,” while the upward shift in oil prices “has become hard to ignore.”  

Deutsche Bank also announced a bearish outlook for emerging currencies. 

“The market's view of the EM outlook has turned increasingly bearish and not just due to China,” Oliver Harvey, a macro strategist, said in a note. “The largest downward revisions to the EM growth complex over the last month have come from South Asia and CEE,” he said, referring to central and eastern Europe.

On Wednesday, the Mexican peso dropped for a fifth day, its longest losing streak since May, and South Africa's rand fell for a third day, hitting its weakest since early June. 

The Turkish lira rose as much as 0.2% against the dollar after President Recep Tayyip Erdogan said Turkey will use “tight monetary policy” to slow inflation. That represents a reversal of his previous stance, having argued that he would not advocate for higher rates, saying they caused inflation.

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Poland's central bank is expected to cut its policy rate by a quarter percentage point to 6.5%, its first move to ease in three years, ahead of elections in less than six weeks. Governor Adam Glapinski said a cut would be warranted if inflation slid into the single digits. 

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Fitch Ratings placed Gabon's credit rating on negative watch, citing high political uncertainty following the military coup on Aug. 30, sparking a selloff in its bonds. Separately, Goldman Sachs said the significant repricing of risk for Gabon's dollar bonds has spilled over to the debt of its regional peers.

After hitting $90 a barrel for the first time this year, Brent Crude was trading 0.6% lower for the first time in seven days. Worst affected by the surge in fuel prices will be the poorest emerging markets “where fuel purchases are a high portion of household consumption, like India in Large EM and Jordan, Kenya, Morocco, Pakistan, Philippines,” said Hasnain Malik from Tellimer. 

(Updated with Turkish lira in eight paragraph.)

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