(Bloomberg) -- Traders pared bets on emerging-market stocks, bonds and currencies on Friday as worries over the health of the banking sector mounted, stoking jitters of a global recession.
The main MSCI indices for emerging-market currencies and stocks trimmed daily advances during the US session amid a broad selloff in riskier assets, as investors worried the $30 billion lifeline that the biggest US lenders threw to First Republic Bank won’t be enough to prevent an economic downturn.
“EM is simply a passenger in the current global macro volatility train,” said Patrick Esteruelas, head of research at Emso Asset Management. “We are completely at the mercy of whether the market prices a systemic financial meltdown or instead believes that the combination of unique vulnerabilities of a sub-segment of banks and a strong response from the authorities is enough for us to trade fundamentals again.”
- Read more: First Republic’s $30 Billion Rescue Fails to Quell Investor Fear
The Mexican peso and Brazilian real paced declines among major currencies, followed by the Chilean peso, while an MSCI gauge of Latin American shares posted its worst week since June. Sovereign spreads from emerging-market dollar bonds rose to the highest since November, JPMorgan Chase & Co. data shows.
Traders continued to hedge against further swings in the Indonesian rupiah, Brazilian real and Turkish lira, according to gauges of implied volatility.
Citigroup Inc. said that its indicator of implied volatilities for various macro assets moved into the “danger zone” on Monday.
This suggests “the environment remains difficult,” the US bank’s analysts including Dirk Willer and Luis Costa wrote in a report on Thursday. Overall, Citigroup’s emerging-market model bond portfolio is flat duration, with overweights in Latin America offset by an underweight position in China. It’s also bearish on currencies in central and eastern Europe, the Middle East and Africa.
Worries about US regional lenders after the collapse of Silicon Valley Bank and troubles at Credit Suisse Group AG had sent measures of implied volatility for developing currencies and stocks this week to the highest since at least December. The gauges, which got a brief respite on Thursday, climbed again on Friday. The cost to hedge against default in the developing world rose 23 basis points this week, the biggest jump in six months.
“Credit conditions are troubling here and that could keep pressure on EM assets,” said Ed Moya, a senior market analyst at Oanda Corporation. “Volatility ain’t going away anytime soon. We all knew this impressive tightening cycle would break something.”
The focus is now shifting to next week’s pivotal Federal Reserve meeting and more generally, to how concerns about financial stability will influence economic policy. Traders have boosted bets again that the Fed will hike interest rates on Wednesday after the bank crises eased and the European Central Bank tightened policy.
“Central banks are still challenged by inflation and now have to contend with financial stability risks,” Eimear Daly, an emerging-market strategist at NatWest in London, said in a note. “Markets remain on high alert with risk sentiment fragile.”
--With assistance from Vinícius Andrade and Philip Sanders.
(Updates with prices throughout, adds quote in third paragraph)
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