Emerging-market stocks and currencies extended declines as a swirl of headlines on President Donald Trump’s trade policies upended global markets on Monday.
MSCI’s main emerging equity index slid as much as 8.4%, its biggest drop since the global financial crisis, as China’s retaliatory duty on US goods rippled through Asian markets. A gauge of EM currencies, which was already down for the day, hit a fresh session low as Trump threatened an additional 50% tariff on China unless the levies are withdrawn.
The sweeping US tariffs introduced last week are threatening to sharply slow the US economy, with many economists, including at Goldman Sachs Group Inc., seeing the risk of recession and traders boosting bets on Federal Reserve interest rate cuts.
The higher levies could also devastate developing nations’ trade and economies, especially as countermeasures kick in. Hard currency bonds from nations including Pakistan and Sri Lanka — which were levied at 29% and 44%, respectively — were among the worst performers Monday.
Morgan Stanley told investors to add to their bearish bets on emerging-market currencies, while recommending increased exposure to local debt and interest-rate swaps on expectations for a more dovish stance from developing-world central banks.
“We don’t believe FX markets are fully pricing a global recession,” strategists including James Lord write in a note Monday, suggesting going long the US dollar against the Colombian peso, and also betting on gains in the euro against the Polish zloty.
China rout
Beijing, which faces some of the stiffest curbs, retaliated Friday with tariffs on US imports. The moves sent Chinese shares in Hong Kong down 13.8% on Monday, putting them into a bear market, while the People’s Bank of China weakened its daily yuan reference rate to a level unseen since December. That’s raised speculation Beijing may resort to devaluing the yuan against the dollar.
The offshore yuan added to losses, falling to a session low after Trump’s threat of more tariffs. Latin American currencies also dipped further on the headlines, with the Colombian peso falling more than 3% and the Brazilian real hitting the lowest since January.
The Vanguard FTSE Emerging Markets ETF, known by its ticker VWO,
