(Bloomberg) -- Emerging-market stocks sank on Monday amid mounting concern over a slowdown in the US, while an unwinding of Japanese yen-funded carry-trade positions rattled Latin American currencies.
An index of emerging-market equities fell 4.2%, extending losses that began Friday in the worst two-day drop since March 2020, the start of the Covid pandemic. A plunge in the shares of technology companies in Taiwan and South Korea led the decline.
The MSCI developing market currency index closed higher, lifted by gains in Asian currencies. But a rally in the yen, which has been the preferred asset to fund the so-called carry trade, helped drive Latin American currencies lower with the Mexican peso falling as much as 5.4% before paring losses.
The unwinding of the carry trade — in which investors borrow in a low-yielding currency and bet on one with higher interest rates — began with a shift in monetary policy in Japan, said Gabriela Siller, head of economic research at Mexico’s Grupo Financiero Base.
“The rest is the domino effect due to panic,” she said.
The Brazilian real dropped to its lowest level since March 2021 at one point, before reversing losses. The real and the peso have been the most punished emerging-market currencies over the last month, down nearly 7% and 5%, respectively.
Six-month implied volatility in the Mexican peso spiked to an over three-year high, further undermining the appeal of carry trades in the currency.
Corporations that use Mexican pesos were likely selling dollars at current levels, said Christian Lawrence, a cross-asset strategist at Cooperatieve Rabobank, helping contain Monday’s losses.
“This is positioning, this is not fundamental,” he said, projecting the peso could return to levels around 18.50 per dollar from around 19.36 as of Monday afternoon in New York. “These are not peso shorts, its longs being unwound.”
MSCI’s Latin American equity index fell to its lowest since March 2023. Monday’s losses erased year-to-date gains in the wider emerging market stock index. The gauge has fallen nearly 10% from a peak on July 11.
Taiwan’s Taiex index fell 8.4%, its biggest one-day loss since 1967, as the flagship of the developing world’s artificial-intelligence ambitions, Taiwan Semiconductor Manufacturing Co., sank nearly 10%. In Korea, the Kospi index tumbled 8.8%, the most since 2008 with the slump led by Samsung Electronics Co. Ltd and SK Hynix Inc.
Israel’s benchmark index recovered from an over 3% loss to close down 0.9% as the nation braces for attacks from Iran and Hezbollah.
--With assistance from Vinícius Andrade.
©2024 Bloomberg L.P.
