Emerging-Market Selloff Picks Up as Traders Look to Fed Meeting

The Impact of Geopolitics on Markets
  • Tech stocks lead decline as Samsung tumbles most in four years
  • South Korean won leads developing-nation exchange rates lower

Emerging-market stocks and currencies tumbled in the biggest two-day drop since June as traders weighed the potential time-line for U.S. interest rate increases before the Federal Reserve’s policy meeting next week.

The MSCI Emerging Markets Index slid from the highest level in more than a year, led by declines in technology stocks. Hong Kong’s Hang Seng China Enterprises Index slumped the most in seven months. South Korea’s won led currencies lower amid concern North Korea is planning an additional nuclear test after the latest detonation drew condemnation from governments including the U.S. and Japan.

The biggest selloff in developing-nation stocks since the U.K.’s vote to leave the European Union comes as central bankers question the benefits of accommodative policy and extending stimulus. Boston Fed President Eric Rosengren said on Friday the economy could overheat should policy makers wait too long to hike rates. Fed Governor Lael Brainard remained dovish in a speech Monday, even as she said the economy is making gradual progress toward achieving the central bank’s goals.

“Recent comments on potential rate hikes have caused some profit taking after a long and sustained rally,” said Nathan Griffiths, who helps oversee about $1.1 billion as a senior money manager at NN Investment Partners in The Hague. “Likely this is a pause rather than a reversal, given pent-up demand for emerging markets.”

Brainard, a member of the board of governors, is the last speaker before next week’s Fed meeting. Futures traders put the odds of an interest-rate increase this month at 22 percent and 57 percent by December.

For more on what to expect from Brainard, click here

Investors added money to exchange-traded funds that buy emerging market stocks and bonds for the 15th straight week, pushing inflows above $20 billion, data compiled by Bloomberg show. Net inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $785.7 million, compared with $509.4 million in the previous period.

The MSCI emerging stocks benchmark dropped 2.2 percent to 889.41, pushing the two-day decline to 4.1 percent. All industry groups fell. Markets in Indonesia, Turkey, Malaysia and Middle East were among those closed for holidays.

Samsung’s Slump

Samsung Electronics Co. plunged 7 percent in Seoul, the biggest slide in four years, after U.S. regulators and the company itself warned users of its Note 7 smartphones to immediately turn off and stop charging them. The Hang Seng gauge of mainland Chinese companies traded in Hong Kong fell 4 percent.

The Micex Index declined 0.4 percent in Moscow. Uralkali PJSC fell 2.6 percent after the potash producer was replaced in the VanEck Vectors Russia index by Inter RAO PJSC, which gained 2.5 percent.

The MSCI Emerging Markets Currency Index slid 0.5 percent, after a 0.8 percent decline on Friday.

South Korea’s won fell the most in three weeks, dropping 1.2 percent after Yonhap News reported U.S. and South Korean intelligence authorities assessing there is high chance of North Korea will conduct an additional nuclear test. The isolated nation may conduct the test in the yet unused No. 3 tunnel at its Punggye-ri test site, South Korean Defense Ministry spokesman Moon Sang Gyun told reporters at a briefing in Seoul Monday.

Yield Spread

The Taiwanese dollar was the second-worst performing currency in developing nations, declining 0.6 percent. Colombia’s peso also fell 0.6 percent.

Economic vulnerabilities to rising interest U.S. rates have diminished over the past year, said Neil Shearing, the chief emerging-market economist for Capital Economics in New York.

“The economic vulnerabilities of EMs to rising U.S. interest rates are often overplayed,” Shearing wrote in an e-mailed note. “For most, the economic implications are limited.”

The premium investors demand to own developing-market bonds over U.S. Treasuries widened six basis points to 335.

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