Brexit Sparks Emerging-Market Selloff as Polish Assets Worst Hit

El-Erian: Europe's 'Plan B' Is Critical to Markets
  • Zloty, rand lead losses among currencies as volatility rises
  • Credit-default swaps surge as investors rush to buy protection

Eastern Europe and South Africa led a selloff in developing-nation assets following Britain’s vote to leave the European Union as investors speculated that their economies will be the worst affected by the fallout from Thursday’s referendum.

Historical 100-day volatility in a gauge of currencies surged to the highest since March 2012. Poland’s zloty tumbled to the lowest closing level against the euro since January. The rand ended a five-day gain. Benchmark stock indexes in Warsaw, Prague and Istanbul all retreated at least 3 percent. The premium investors demand to hold emerging-market sovereign debt rather than U.S. Treasuries increased the most since June 2013. The cost of hedging against a default by Hungary jumped to a 17-month high.

The U.K. moved toward ending four decades of EU membership as the “Leave” campaign won the vote, prompting Prime Minister David Cameron to resign. That sent tremors across markets that rallied in the past five days on pre-vote predictions for a victory to the “Remain” side. The verdict increases the likelihood that emerging EU member states will receive less financial support from the EU and lose out on common-market access to Britain.

“I went to bed thinking the U.K. would definitely stay in the EU and woke up in an entirely different world,” said Evgeny Shilenkov, head of trading at Veles Capital LLC in Moscow. “The worst part is that we still have many unknowns. I wonder if there will be a domino effect. The whole Brexit story hasn’t been priced in and we can see many surprises down the road.”

The MSCI Emerging Markets Index dropped 3.5 percent to 805.87, leaving it little changed for the week. All 10 industry subgroups on the gauge fell on Friday. Developing-nation stocks trade at a valuation discount of 24 percent relative advanced-nation equities, compared with 25 percent earlier this week.

The MSCI Emerging Markets Currency Index slid 1.2 percent. The bond premium, tracked by JPMorgan Chase & Co. indexes, widened 21 basis points to 401.

To read Bloomberg’s main story on Britain leaving the EU, click here.

The WIG 20 Index in Warsaw tumbled 4.5 percent, its biggest one-day decline in 10 months. The zloty, regarded as a proxy for emerging-market risk to Brexit, weakened 2 percent against the euro. The yield on 10-year government bonds increased 17 basis points to 3.18 percent.

“Central and eastern Europe have by far the most to lose in all this, given they are the clear net beneficiaries of EU membership,” said Simon Quijano-Evans, chief emerging-market strategist at Commerzbank AG in London. “The rest of the EM has to start thinking about the secondary effects on global growth.”

The Borsa Istanbul 100 Index of Turkish stocks slid 3.4 percent. The rate on the 10-year sovereign bond climbed 26 basis points. The lira retreated 2.5 percent against the dollar.

The Budapest Stock Exchange Index dropped 4.5 percent to the lowest level in three months. The cost to insure against losses in Hungarian bonds using five-year credit default swaps rose 28 basis points to 182 basis points, the highest level since January 2015.

South Africa, Brazil

The rand weakened 4.4 percent against the dollar. The FTSE-JSE Africa All Share Index slumped 3.6 percent, the most since 2010. The government’s 2026 bonds dropped, sending yields up 21 basis points to 9.09 percent.

“The rand will be affected in the short term with a general knee-jerk risk-off perception,” Philip Saunders, co-head of multi-asset management at Investec Asset Management Ltd., which oversees $116 billion, said by phone from London. “The initial reaction is probably going to be one whereby you see markets becoming somewhat disorderly and South Africa is going to be caught up in that backwash.”

The real weakened and Brazilian stocks slumped as Britain’s vote to leave the European Union spurred concern the recession in Latin America’s largest economy will deepen amid a widening budget deficit. The currency slid 1.1 percent, while the Ibovespa equity gauge dropped 2.8 percent.

Central banks in South Korea and India were among those reported to have intervened to smooth trading in their currencies. The won closed down 2.5 percent. The rupee slid 1.1 percent.

Currencies perceived as more vulnerable, such as the ringgit and the rupiah, will be under pressure in the event of a Brexit, said Paul Danes, Asia portfolio manager at Martin Currie Investment Management, an affiliate of Legg Mason Inc., which manages $718 billion globally.

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