FX regains composure, stocks fall further on Delta woes

PUBLISHED: Tue, 20 Jul 2021 10:57:01 GMT
Ambar Warrick
Reuters
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Key Points
  • MSCI EM FX pares most YTD gains
  • CZK rises as producer prices beat expectations
  • High yielders ZAR and BRL worst hit by rout

July 20 (Reuters) – Emerging market currencies appeared to have stabilized, while stocks sank further on Tuesday as worries over rising cases of COVID-19’s Delta variant drove broad moves out of risk-driven assets.

MSCI’s index of emerging market (EM) currencies fell about 0.07%, after tumbling 0.4% on Monday in its worst day in a month.

In Europe, the Middle East, and Africa (EMEA), the South African rand and Russian rouble rose about 0.2% each, while most other currencies inched lower.

MSCI’s index of EM stocks fell 0.5%, extending a 1.7% slide from Monday as rising Delta cases across the globe sowed fears of slowing economic growth, even as several countries began scaling back COVID-related curbs.

Most EMEA stock indexes rose on Tuesday.

Safe havens such as the dollar and the Japanese yen surged on renewed demand.

“The spread of the Delta variant is not going to suddenly stop and will therefore continue to occupy the markets,” You-Na Park-Heger, FX and EM analyst at Commerzbank wrote in a note.

“The summer blues might well continue a little longer. Of course, that does not mean that the sell-off will continue at the same speed, but it looks as if the party is over for financial markets for now.”

High-yielding currencies such as the rand and Brazil’s real , which have outpaced their EM peers this year, were the worst hit by the rout, losing about 2.7% and 1.2%, respectively.

The steep losses come after strong economic readings and hawkish central banks brightened the outlook for EM assets this year. MSCI’s currency index has now relinquished most of its gains this year, and is trading flat. Stocks have also trimmed most of their gains.

EM debt was also on the ropes, with JPMorgan EMBI spreads at their highest in nearly four months.

In South Africa, a court adjourned the corruption trial of former president Jacob Zuma to August 10. Zuma’s jailing had triggered some of the worst violence in the country in the post-apartheid era, and had hammered the rand.

Chinese stocks fell, while the yuan was largely unchanged after the central bank kept a benchmark lending rate unchanged, despite some expectations of more policy easing in the country.

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In central Europe, the Czech crown was the sole gainer against the euro, after higher-than-expected producer price inflation raised expectations of more policy tightening by the central bank.

For GRAPHIC on emerging market FX performance in 2021, see http://tmsnrt.rs/2egbfVh

For GRAPHIC on MSCI emerging index performance in 2021, see https://tmsnrt.rs/2OusNdX