Stocks and Currencies Fall as Dollar Rises on Rate Rise Bets and GDP Fears

Stocks and Currencies Fall as Dollar Rises on Rate Rise Bets and GDP Fears

“The weakness we’re seeing isn’t because of EM, but more the risk aversion across markets, as EM currencies, stocks and bonds are repricing risks around a longer U.S. Federal Reserve tightening cycle or a longer period of inflation,” said Cristian Maggio, head of emerging markets strategy at TD Securities. Russian President Vladimir Putin led celebrations of the Soviet Union’s victory over Nazi Germany and said troops fighting in the Donbas region were doing so for their motherland.

On fears about aggressive monetary policy tightening and weakening global growth, emerging market stocks and currencies took a beating on Monday as the US dollar hit two-decade highs. The MSCI emerging market currencies index sank 0.6 percent to its lowest level since November 2020, while the stocks index fell 1.3 percent to a near two-year low. Rising US interest rates, the war in Ukraine, and stricter COVID-19 lockdowns in Beijing and Shanghai pushed the safe-haven greenback to its highest level since late 2002.

“The market was concerned there could be announcements from Putin, such as a formal declaration of war, but he made rhetorical comments painting Russia as a victim rather than the aggressor, so the speech delivered no surprises,” Maggio added. Meanwhile, Sri Lankan Prime Minister Mahinda Rajapaksa on Monday offered his resignation amid the nation’s worst economic crisis since independence that has led to widespread protests. Sri Lanka’s rupee was 1.4% weaker against the dollar.

“The chance of the prime minister going was always quite high – the question now is if the president, (Gotabaya) Rajapaksa, now goes,” Abrdn emerging market debt investment director Kevin Daly said. “These guys are all damaged goods, so they probably need a new government to get things going again.”

EM spreads and yields rose but were still a fair way down from the peaks hit just after Russia’s invasion of Ukraine in late February. The average bond price in JPMorgan’s “EMBIGD” index fell below COVID-19 lows registered in early 2020, the asset manager said in a note on Monday, saying the backdrop has become increasingly difficult for EM sovereigns. JP Morgan’s family of EMBI indexes measure aversion to developing countries’ risk.

Elsewhere, worsening risks of a deeper slowdown in the world’s second-largest economy, China’s export growth slowed to single digits, the weakest in almost two years, while imports barely changed in April as COVID-19 restrictions hit factory production and demand. Chinese blue-chip shares finished the day 0.8% lower at 3,877.44 points. China’s yuan dropped 0.9% to an 18-month low, while India’s rupee fell 0.7% to hit a record low.

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