India becomes latest epicenter of nervousness sweeping emerging markets

Rupee down as much as 1.3%, most across emerging Asia

India became the latest epicenter of the nervousness sweeping emerging markets as better-than-forecast current-account data failed to stem the slide in the rupee.

The currency sank as much as 1.3 per cent, while stocks dropped the most since August and bonds tumbled to the lowest level since 2014. Turkey’s lira also weakened, wiping out about half of last week’s gains, while declines in almost every other developing-nation currency left the benchmark MSCI Index close to dropping below its 200-week moving average for the first time since early 2017.

Though India’s current-account deficit was narrower than expected, the fact that it widened at all -- it was the biggest shortfall in five years -- rattled traders. Investors are concerned about countries with unsustainable current-account and fiscal deficits as well as accelerating inflation and higher-than-average foreign ownership of domestic debt, according to State Street Global Advisors.

These are the markets that are “more prone to global mood swings,” said Abhishek Kumar, the London-based sector head for emerging markets, fixed income beta.

The world’s developing economies have been reeling since April from a combination of escalating trade tensions, the gradual end of central bank policy accommodation and a raft of idiosyncratic risks from contentious elections in Brazil to controversial land reform measures in South Africa.

The rout, which dragged emerging stocks into a bear market last week, is prompting investors to pay up for protection. Implied volatility for an exchange-traded fund tracking the shares has jumped to its highest level since November 2016 relative to that for an S&P 500 Index ETF. The MSCI Emerging-Markets Index is hovering around its lowest level in more than a year, while the US gauge closed 1.5 per cent away from a record high.

HIGHLIGHTS

• MSCI index of stocks slides 0.8 per cent, gauge for currencies falls 0.3 per cent
• Rupee leads retreat in emerging Asian currencies. Stocks fall as much as 1.1 per cent and the yield on 2028 local-currency bonds climbs 11 basis points to 8.1 per cent
• India’s current-account gap widened to $15.8 billion
• Lira curbs drop of as much as 1.4 per cent after data showed Turkey’s economy expanded 5.2 per cent year-on-year in the second-quarter
• South Korea’s won declines 0.5 per cent; Bank of Korea is considering lowering forecast for 2018 GDP, CPI and jobs in October amid sluggish economic indicators, Chosun Biz reports
• Russia’s ruble rises 0.1 per cent. If US sanctions flip Russia to basket case from haven, a fresh stampede from emerging markets could be in the cards, according to some investors and analysts.