Emerging Market Stocks Post Biggest Drop Since March 2009 on U.S. Rating

Emerging-market stocks plunged, with the benchmark index posting its biggest drop since March 2009, after Standard & Poor’s cut the U.S. debt rating.

The MSCI Emerging Markets Index retreated 4.9 percent to 990.18 at 5 p.m. in New York. Brazil’s Bovespa index tumbled 8.1 percent, China’s Shanghai Composite Index fell 3.8 percent and Russia’s Micex Index sank 5.5 percent. Mexico’s peso weakened 2.7 percent against the dollar.

The Shanghai Composite and Colombia’s IGBC index both dropped to levels that are more than 20 percent below highs reached last year, while the MSCI gauge extended its 2011 retreat to 14 percent after S&P lowered the U.S. one level to AA+ and kept a “negative” outlook on Aug. 5. Eastern European currencies declined as Spanish and Italian bonds rallied.

“Friday’s downgrade, along with recent weakness in the U.S. economic data and the ongoing European sovereign debt crisis, highlight the external risks currently facing emerging markets,” RBC Capital Markets strategists led by Nick Chamie in Toronto wrote in an e-mailed note. “We will be watching closely for signs of stabilization to take advantage of better entry levels.”

The MSCI index tumbled 8.5 percent last week as gauges of U.S. manufacturing and consumer spending trailed economists’ estimates, fueling speculation that the world’s largest economy may fall back into a recession. Industrial, technology and energy companies have led the five-day slide on concern slowing exports to the U.S. and Europe will curb earnings. About $5.4 trillion in market value has been erased from global equities since July 26, according to data compiled by Bloomberg.

Recovery at Risk

“While measures may come to stabilize financial markets, the key is whether the real economy could settle back into a recovery track,” said Chu Moon Sung, a Seoul-based fund manager at Shinhan BNP Paribas Asset Management Co., which oversees $29 billion. “Volatility will be here for a while.”

The extra yield investors demand to own emerging-market debt over U.S. Treasuries jumped 34 basis points, or 0.34 percentage point, to 354, according to JPMorgan Chase & Co.’s EMBI Global Index. It was the biggest increase since March 2009.

Yields on Brazilian interest-rate futures plunged for a sixth straight day. The yield on the contract due in January 2013 fell 26 basis points to 11.97 percent, the lowest since November 2010. Brazil’s real weakened 3.1 percent, the most since May 2010, to 1.6263 per dollar.

Fiscal Outlook

The S&P 500 Index retreated 6.7 percent. America’s credit rating may be cut to AA within two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt, S&P said after markets closed in New York on Aug. 5. The Treasury Department said there is “no justifiable rationale” for S&P’s move.

“Standard & Poor’s potential downgrade of U.S. debt had been signaled for a few weeks, so it did not come as a complete surprise,” Mark Mobius, the executive chairman of Templeton Asset Management’s emerging markets group, wrote on the fund company’s website today. “Nonetheless, the initial market reaction will likely be a high degree of uncertainty and volatility, since investors will likely not know where to turn for assets with lower short-term volatility.”

Yuan Strength

The Shanghai Composite fell to the lowest level since July 2010. China’s official Xinhua news service said in a commentary that the U.S. must cure its “addiction” to borrowing. China is the biggest foreign owner of Treasuries, holding $1.16 trillion of the notes as of May, Treasury Department data show.

The yuan strengthened the most since April, touching a record high, after the U.S. downgrade fueled speculation China will rein in dollar purchases used to limit appreciation. The yuan rose 0.21 percent to 6.4268 per dollar, according to the China Foreign Exchange Trade System. The currency touched 6.4250 earlier, the strongest level since the country unified official and market exchange rates at the end of 1993.

The HSI Volatility Index, a measure of option contracts for Hong Kong’s Hang Seng Index, climbed 6.1 percent today to the highest level since May 2010. The gauge has jumped 92 percent in the past five days, the most on record.

India’s Bombay Stock Exchange Sensitive Index declined 1.8 percent, Taiwan’s Taiex Index lost 3.8 percent, Indonesia’s Jakarta Composite Index sank 1.8 percent and South Korea’s Kospi retreated 3.8 percent.

Program trading on Kospi shares was stopped for five minutes after Kospi 200 Index futures fell more than 5 percent for more than a minute, Korea Exchange said.

“We’re seeing real panic selling,” said Im Jeong Jae, a Seoul-based fund manager at Shinhan BNP Paribas Asset Management Co., which oversees about $29 billion. “Concerns about global economic conditions are affecting Asian markets overall. Korea, which has relatively more liquidity, is feeling a harder pinch.”

The South African rand weakened 3.9 percent versus the dollar. Poland’s zloty depreciated 1.1 percent against the euro, while the Czech koruna strengthened 0.3 percent.

To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Saeromi Shin in Seoul at sshin15@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

Aug. 8 (Bloomberg) -- Marc Faber, publisher of the Gloom, Boom & Doom report, talks about the impact of Standard & Poor's credit-rating downgrade of U.S. sovereign debt on financial markets and his investment strategy. Faber speaks from Chiang Mai, Thailand, with Susan Li on Bloomberg Television's "Asia Edge." (Source: Bloomberg)