Emerging-Market Assets Drop as Brexit Concern Damps Risk Demand

  • MSCI stock gauge set for worst three-day drop since January
  • Yuan falls most in two months amid Chinese stock-market rout

Emerging-market stocks posted their biggest three-day decline since January and currencies weakened as concern the U.K. will vote to leave the European Union prompted a selloff in riskier assets before central bank meetings in the U.S. and Japan.

Chinese equities fell the most since February in Shanghai and the yuan slumped as onshore markets traded for the first time since Wednesday. Taiwan and South Korea’s equity gauges slumped the most in four months. A gauge of developing-nation currencies slumped to a one-week low, led by the Brazilian real.

A three-week rally emerging-market equities driven by bets that the Federal Reserve will keep U.S. interest rates lower for longer peaked on June 8. The benchmark gauge has declined 3.9 percent since then. The selloff accelerated Monday amid concern that the U.K. will vote to leave the European Union on June 23, reducing the allure of developing-nation assets.

“Emerging markets are more vulnerable in a risk-off environment, especially
those with poor fundamentals and those that have rallied a lot year-to-date,” said Michael Wang, a strategist at hedge fund Amiya Capital LLP in London, who favors Indian, Mexican and South Korean stocks. “There may be some position-squaring ahead of the Fed meeting this week, but there are very few expectations that much will change.”

Brazil, Turkey and South Africa have the most to lose in the current risk-off environment with the U.K. referendum and the terror attack in the U.S. state of Florida on Sunday weighing on sentiment, Wang said.

Two new polls by ICM suggested the U.K. is on course to exit the EU. Phone and online surveys showed the “Leave” side opening up a 5 percentage-point lead over “Remain.” Others in the past week showed the “Leave” campaign leading by as much as 10 percentage points, while some indicated a more balanced contest, with many voters still undecided.

The MSCI Emerging Markets Index fell 1.7 percent to 809.46. All 10 industry groups dropped. The measure has advanced 1.9 percent this year and is valued at 11.7 times the projected 12-month earnings of its members. That compares with multiple of 15.7 for the MSCI World Index, which has slipped 1 percent in 2016.

China Slump

Chinese shares declined on concern about the outlook for the world’s second-biggest economy, even as data released Monday showed signs of stabilization. The Shanghai Composite Index dropped 3.2 percent at Monday’s close, with about 25 shares declining for each that advanced, while The Hang Seng China Enterprises Index of mainland stocks listed in Hong Kong lost 2.4 percent.

Taiwan’s Taiex index retreated 2.1 percent, the most since Jan. 4. South Korea’s Kospi dropped 1.9 percent, its steepest decline since Feb. 11.

The Ibovespa rose 0.5 percent. The Brazilian equity benchmark dodged the broader selloff as Ultrapar Participacoes SA’s plan for a $635 million acquisition fueled speculation that the country is ripe for more deals as the economy rebounds from its worst recession in a century.

The PX Index fell 2.6 percent to a seven-year low in Prague as energy producer CEZ AS tumbled to the lowest in two weeks. Russian markets were closed for a holiday.

Currencies

The MSCI Emerging Markets Currency Index declined 0.4 percent, and has lost 1 percent over three days. The real weakened 1.5 percent. The Mexican peso declined 1.1 percent. South Korea’s won fell 0.7 percent.

The yuan lost about 0.4 percent in Shanghai, approaching a five-year low against the dollar. A gauge of the greenback’s strength climbed 1.1 percent when mainland markets were closed for holidays Thursday and Friday.

“The decline in major currencies is largely driven by the dollar rally in the New York session last Friday,” said Ken Cheung, Asia foreign-exchange strategist at Mizuho Bank Ltd. in Hong Kong. “Brexit, Fed rate-hike path, and also the yuan’s depreciation pressure recently ramped up the risk-off mood, and market participants looked for safe-haven assets such as the yen.”

The premium investors demand to own emerging-market sovereign debt rather than U.S. Treasuries widened four basis points to 398, according to JPMorgan Chase & Co. indexes.

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