(Bloomberg) -- Developing world stocks rebounded on Tuesday in their biggest one-day gain in two months as they bounced back from a steep two-day slide.
MSCI’s index for emerging-market equities rose 1.4%, with exchanges in Taiwan and South Korea partially recouping some of their losses. Taiwan Semiconductor Manufacturing Co. posted its biggest rally since November 2022.
“It seems that what we saw yesterday was just some panic,” said Marco Oviedo, a strategist at XP Investimentos in Brazil. “EM sentiment seems to be cautious, probably waiting for more US data on the activity front.”
A broad gauge of developing-nation currencies was little changed as losses in Asian and Eastern European currencies were offset by gains across most of Latin America. Brazil’s real rose sharply on expectations that the country’s central bank could lift borrowing costs in the coming months just as the US is seen lowering interest rates.
Mexico’s peso, one of the currencies hit hardest by the Japanese yen’s rally and an unwinding of carry trade strategies, weakened for the fourth session in a row. Traders remained cautious as they attempted to measure just how much further currencies could slump if the yen keeps gaining ground.
JPMorgan Chase & Co. warned that the unwind has more room to run as the yen remains one of the most undervalued currencies. XP’s Oviedo said if the Bank of Japan raises its benchmark interest rate by another 25 basis points to 0.50%, Mexico’s peso could head back toward 21 per dollar, where it was trading in 2022 when a bout of yen weakness took off.
“The Bank of Japan hikes and BAM! The carry trade loses all appeal,” said Juan Perez, director of trading at Monex USA. “As long as there is belief that Japan will be an isolated safe-haven to go to in order to escape the chaotic environment we are in, this phenomenon will continue.”
The unwinding of the carry trade is a “double hit” for Latin American currencies, he said, along with data that points to weakness in the economies of the US and China, the region’s top trading partners.
The selloff in stocks on Monday added to losses that began on Friday and sent the MSCI index below its 200-day moving average for the first time since January. The index failed to climb back above that level on Tuesday.
“It’s reasonable to see some kind of a bounce after the rapid selloff over the past few sessions,” said Vey-Sern Ling, managing director at Union Bancaire Privee in Singapore. “Having said that, with US economic growth set to slow in the second half, election uncertainty, and still-stretched valuations, it would make sense for investors to use any technical rebounds to reposition.”
Chinese brokerages are arguing a US slowdown and local stimulus will lead to sustained gains for stocks in the world’s second biggest economy.
However, emerging market stocks are on the cusp of a major selloff, according to Arthur Budaghyan, chief emerging markets and China strategist at BCA Research, who correctly predicted a decade of underperformance for the asset class in the wake of the financial crisis.
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