Britain's vote to leave the European Union continued to hurt
emerging markets on Monday, with currencies and stocks falling from
South Africa to Poland as investors fled riskier assets.
The declines highlight how the U.K.'s referendum result, the
so-called Brexit, is causing ripple effects across the world,
raising uncertainty about global growth and pushing investors into
assets they see as safe, such as the U.S. dollar. The dollar's
gains are in turn feeding back into the concerns lining up outside
emerging markets, making their greenback-denominated debt and the
commodities they sell more expensive.
Monday's selloff extended steep falls on Friday, threatening to
undo a rally that has boosted emerging markets since the end of
January.
The South African rand fell 1.5% to 15.31 rand to the dollar,
while the Polish zloty was down 1.2% to 4.058 zloty against the
dollar. In China, the yuan fell to its weakest level against the
dollar since late 2010, after The People's Bank of China weakened
the yuan by the most since August.
The Mexican peso, often seen as a bellwether for the world's
emerging markets, was also down on Monday, falling 0.7% against the
dollar to 19.05. That follows sharp falls on Friday when, at one
point, the peso dropped to its worst level against the dollar on
record, 19.52 pesos per dollar, according to FactSet data available
back to 1957.
"Brexit has hit sentiment across the board and will have a quite
strong impact on emerging markets for the next month or two, at
least" said Richard Segal, emerging-market analyst at Manulife
Asset Management, which manages $324 billion.
The turbulence comes at a time when emerging market economies
were already showing signs of strain. Export growth from emerging
economies fell this year to their lowest levels since the financial
crisis, according to UBS. After Thursday's referendum, analysts
have slashed their forecasts for global growth and that will
inevitably reverberate back to the emerging world.
Bank of America Merrill Lynch now predicts that gross domestic
product in the European Union will grow by 1.1% next year, down
from a forecast of 1.6% before the Brexit vote.
"Europe's recovery is at risk [and the uncertainty] could easily
push the eurozone back into stagnation or even recession," said
Larry Hatheway, head of multi asset portfolio head at GAM Holding.
"In that case, the fallout [for emerging markets] could be
considerable."
Mr. Hatheway predicts declines in these markets could be as
severe as those seen last August and September and at the start of
this year, when concerns over Chinese economic growth rocked
emerging markets.
The emerging economies in Central and Eastern Europe are
particularly vulnerable, analysts said. The U.K. is Poland's
third-biggest export destination and more than half a million Poles
live in Britain, many of whom send remittances back home. The
Polish stock market was down 1.4% on Monday. In the Czech Republic,
the PX-50 shed 3.9% by midday. Hungary's currency, the forint, is
down 1.4% against the dollar.
The effects were palpable even in China, the world's
second-largest market. The central bank fixed the yuan at 6.6375 to
the dollar from Friday's midpoint of 6.5776, the weakest level for
the domestic currency since Dec. 24, 2010.
"The market should be a little bit disappointed as most of the
traders hoped that China's central bank should offer some sort of
'stability' amid rising market uncertainties," Zhou Hao, senior
economist for emerging markets in Asia at Commerzbank AG.
"Undoubtedly, today's [yuan] fixing rates hint that the market
should be prepared for more volatility."
Gains in the dollar are key for emerging markets. As domestic
currencies fall, dollar-denominated debt becomes more expensive to
service and pay back.
As of the third quarter of 2015, the Bank for International
Settlements estimates there was about $1.1 trillion in
dollar-denominated bonds issued by nonbank emerging-market
companies outstanding, up from $509 billion at the end of 2008.
The rising dollar is making commodities more expensive for
holders of other currencies, threatening to dent demand in
everything from oil to copper.
Emerging markets, particularly in Africa and South America, are
big commodities exporters.
Brent crude, the international oil benchmark, fell 1.6% on
Monday after shedding 4.9% on Friday while all base metals were
lower.
Top commodities player South Africa is being hit in other ways.
The country's wide current-account deficit and tight trade ties to
Europe and the U.K. have made its rand currency particularly
vulnerable to the Brexit-linked turmoil. The rand slumped against
the U.S. dollar on Friday after the results of U.K.'s referendum
were announced.
Hours after the result was announced on Friday, President Jacob
Zuma said that "the uncertainty that arises from this vote means
the volatility that has characterized capital markets in the
lead-up to the vote may persist."
Still, central bank policy in the wake of the Brexit vote might
help cushion the blow for emerging markets. Lower-for-longer
interest rates in the developing world would make those markets
more attractive for yield-seeking investors.
Federal-funds futures, used by investors and traders to place
bets on the Federal Reserve's policy, now show any U.S.
interest-rate increase this year as very unlikely, CME Group data
show. Investors also now expect the Bank of England to cut interest
rates there.
"Brexit is generally negative for growth but could end up
helping emerging countries, especially in Asia, as it pushes back
the Fed raise," said Brett Diment, head of emerging market debt at
Aberdeen Asset Management.
Patrick McGroarty in Johannesburg and Ewen Chew in Singapore
contributed to this article.
Write to Georgi Kantchev at georgi.kantchev@wsj.com
(END) Dow Jones Newswires
June 27, 2016 09:45 ET (13:45 GMT)
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