Emerging Markets Roiled as Stock Selloff Surpasses Asian Crisis

  • Ruble drops to record as oil tumbles below $28 per barrel
  • Indian rupee falls to near record as Middle East shares slide

Emerging Market Stocks Sink to Six-Year Low

Turmoil gripped emerging-market assets as the slide in oil made traders and investors increasingly skeptical that governments and central banks can shore up currencies and stimulate their economies.

Developing-nation stocks extended their worst start to a year ever, currencies slumped to a record and the risk premium on emerging-market debt climbed to the highest in more than six years. Concern that an oil supply glut will worsen sent Brent crude to close at a 2003-low, while the slowest growth in China in a quarter century damped the outlook for the global economy. Russia’s ruble breached an all-time low of 81.10 per dollar and the Mexican peso fell to a record-low close.

“We are now in the correction territory,” Don Townswick, director of equity products at Conning Inc., who said he expects oil prices to drop no deeper than $25 per barrel, said by phone on Wednesday. “Pretty soon we will find the bottom -- which has to be put in by oil prices first -- and build from there.” 

The MSCI Emerging Markets Index dropped 3 percent to 692.76, the lowest close since May 2009. Nine out of 10 industries tumbled more than 2 percent, led by a retreat in energy shares. A gauge tracking 20 developing-nation currencies fell 0.8 percent. More than $2 trillion has been wiped out from the value of developing-nation equities this year as the MSCI Emerging Markets Index slid 13 percent, the worst start to a year since data began in 1988. The drop has exceeded the 7.9 percent decline in the gauge in the same period in 1998 during the Asian financial crisis and the drop in 2009 amid the global financial crisis.

Bear Markets

Traders are betting that it’s become too expensive for policy makers to continue defending exchange rates after investors and companies pulled $735 billion out of developing nations last year, according to the Institute of International Finance. They may also be underestimating the hefty reserves available to policy makers and their willingness to defend the pegs, according to analysts at Deutsche Bank AG and Union Bancaire Privee Ubp SA.

Indian stocks are on the cusp of a bear market, potentially joining the three out of every four major emerging stock markets that have fallen 20 percent from peaks. Petroleo Brasileiro SA slumped to the lowest levels in more than a decade, while Saudi Arabian equities tumbled 5 percent as the kingdom was said to order banks to stop trading options used to bet against the riyal. Cnooc Ltd., China’s largest offshore oil company, slid to a 2009 low. The Mexican peso fell to a record, while the Turkish lira traded near an all-time low.

“With some losses already booked this year in their portfolios, investors will avoid risk as much as possible," said Attila Vajda, managing director at Singapore-based advisory firm Project Asia Research & Consulting Pte. “Investors remain more pessimistic with the global outlook."

The International Monetary Fund cut its global growth outlook on Tuesday, highlighting a slowdown in emerging markets and risks tied to the Federal Reserve’s gradual exit from ultra-low interest rates. The fund left its estimate for China’s growth this year unchanged at 6.3 percent, and downgraded its forecast for Brazil by 2.5 percentage points to a contraction of 3.5 percent in 2016. It now expects Russia’s economy to shrink 1 percent this year, compared with an expected contraction of 0.6 percent in October.

The rupee slid 0.5 percent to close at 67.9650 a dollar in Mumbai after falling past 68 per dollar for the first time since September 2013, within 1 percent of its record low.

The ruble weakened 3.5 percent to 81.4 per dollar, surpassing the level it touched when Russia’s financial crisis peaked in December 2014 as fighting intensified in Ukraine and international sanctions deepened concern about Russia’s isolation amid an exodus of foreign investors. Latin American currencies continued to slide, with the Mexican and Colombian peso retreating more than 1.3 percent. The premium investors demand to hold emerging-market debt over U.S. Treasuries widened nine basis points to 481, according to JPMorgan Chase & Co. indexes.

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