Currency losses spark sell-off in bonds and stocks
Emerging market stocks fell 1.5 per cent, currencies tumbled to fresh lows and bond yield spreads blew out to their highest in five weeks yesterday in the wake of US treasury yields' surge to two-year highs.
Emerging assets will get little respite ahead of the release of Federal Reserve minutes today, which could indicate whether the US central bank is indeed on track to start paring back its stimulus measures from next month.
In addition, data due from China is expected to show that growth remains under pressure in the world's No 2 economy.
"Concerns are clearly escalating. The news flow from Asia is horrific and the policy reaction is stop-start," said Lars Christensen, the chief emerging markets analyst at Danske Bank. "I don't see this stopping until we get clarity on the Chinese macro situation.
Christensen said the currency weakness would continue to filter through to stock and bond markets as foreign dollar-based investors see their losses piling up.
"People are worried the currency sell-off will continue. The problem is if central banks try to curb it, they take out liquidity from the markets," he said.
MSCI's emerging equity index fell to a one-month low for its fourth straight session of losses. Chinese shares also fell, while Indian markets lost 1.5 per cent, led by declines in financial shares that will be hit by the rupee's decline and potential policy tightening steps.
The rupee fell to a fresh record low, forcing the central bank to intervene in the market, while the Indonesian rupiah hit four-year lows.
The rupiah losses filtered through to the Jakarta equity market, which fell 4.5 per cent, extending the previous session's 5.6 per cent drop.
Indonesian dollar bonds were also feeling the heat, with their spreads over US treasury yields blowing out 11 basis points.
Other emerging equity and debt markets would take a hit in coming days, analysts said.
"Apart from rising global yields and the strong dollar trend, we believe the weakness in several key high-yielding emerging markets - including India and Indonesia - is spilling over into the rest," Barclays said.