Emerging market stocks and currencies tumbled on Monday as investors rushed to safe havens on rising COVID-19 cases around the globe, while fears of stricter regulations weighed on major Chinese technology stocks.
MSCI’s index of emerging market (EM) currencies dropped 0.4% and was headed for its worst day in a month, with Turkey’s lira and the South African rand leading losses across Europe, the Middle East and Africa (EMEA). Both currencies fell about 0.7%.
Losses in heavyweight Chinese technology stocks dragged MSCI’s EM stock index 1.3% lower. Most bourses in EMEA fell between 0.6% and 1.2%.
Alibaba and Tencent, two of the top three stocks on the MSCI index, fell about 3% and 2.5%, respectively.
A Shanghai court at the weekend posted a list of “typical unfair competition cases” involving several major Chinese tech companies, including Alibaba, Tencent, and search engine Baidu which dropped 3.8%.
But rising virus cases, particularly of the highly infectious Delta variant, cast a pall over most risk-driven assets, and encouraged flows into safe havens such as the dollar and the Japanese yen.
“Increasing nerves about the delta-variant COVID-19 are sapping recovery hopes across the Asia-Pacific… you can choose your poison on that front globally, with the U.S., Europe, and the UK also experiencing rises in cases,” Jeffrey Halley , Senior Market Analyst, Asia Pacific, at OANDA, wrote in a note.
South Africa’s rand fell 0.7% after wild swings over the past few sessions, as the weak risk appetite exacerbated concerns over civil violence in the country.
One-month dollar options on the rand, a common gauge of volatility, hovered just below three-month highs.
Turkey’s lira was set to snap a six-day winning streak. The currency has been among the top performing EM units over the past few weeks with a yield of 19% – the highest in the world – and the prospect of near-term stable monetary policy attracting investors.
Minutes of the central bank’s meeting last week will be scrutinised for further affirmation of steady policy.
Turkish markets will be closed for the rest of the week.
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Russia’s rouble fell 0.4%, tracking a drop in oil prices after OPEC+ reached a deal to increase supply. Fears of waning demand, due to a rise in virus cases, have also rattled oil markets in recent weeks.
Central European currencies retreated against the euro and the dollar.
Bloomberg reported that Kota Hirayama, an emerging-market economist at SMBC Nikko Securities Inc. in Tokyo, suggested selling the rand and buying Turkey’s lira after that country’s central bank resisted President Recep Tayyip Erdogan’s calls for lower rates and vowed to maintain its monetary stance until a major drop in price growth.
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“As for the rand, the riots have caused considerable economic damage, may quell market expectations for a rate hike while raising concerns that funds may flow out of the country,” Hirayama said. “Being long in the lira, which has higher interest rates, and shorting the rand is a rational trade as investors can earn yield differentials.”
Others see the rand’s slump as a buying opportunity. Commerzbank AG now favors it against the lira, betting the Turkish currency’s gains against the rand since early June are likely to be reversed by October, according to Tatha Ghose, a London-based senior economist at the firm.
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