Emerging Markets Cap Turbulent Month With Losses Before US Vote

(Bloomberg) -- Emerging-market assets wrapped up a turbulent month as volatility surged in October with rising global yields, a stronger dollar, and investors rushing to reprice risk assets before the US election.

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The MSCI gauge for stocks slid for a third day, closing off October with monthly losses of more than 4%, the biggest drop since January. All major emerging-market currencies have retreated against the dollar this month, fueling a 1.6% decline for the MSCI gauge for developing currencies.

“We had a confluence of events in October,” said Rajeev De Mello, chief investment officer at Gama Asset Management. “For emerging markets, the combination of higher US yields, a stronger dollar, and the risks of a renewed trade war overshadowed the improvement in the growth picture.”

On the day’s moves, MSCI’s gauge for emerging stocks slumped with global equities, as stocks erased their October gains after disappointing outlooks from Big Tech companies such as Microsoft Corp. and Meta Platforms Inc. Meanwhile, MSCI’s companion gauge for currencies rose for a second day with broad dollar weakness, though Bloomberg’s gauge for the dollar capped off the best month in more than two years.

Some Latin American currencies also got a reprieve on Thursday after slumping earlier in the week on US election jitters. Mexico’s peso outperformed peers, snapping a four-day losing streak. Yet, the Brazilian real slid as uncertainty remained around the timing and size of much awaited spending cuts. Also in the region, Colombia’s central bank ignored pressures to implement faster easing as policymakers considered fiscal risks, which have weighed on the currency.

Mexico’s peso is “outperforming today as markets may be assessing valuations and technicals associated with the peso a little closer. MXN has come under significant pressure since June, and current levels may represent interesting opportunities to enter long MXN positions,” said Brendan McKenna, strategist at Wells Fargo.

With traders on edge ahead of the US presidential election next week, McKenna said a win by Vice President Kamala Harris “would act a source of strength for the peso.” Most polls show a tight contest between Harris and Donald Trump.

Investors also continued to monitor US data for clues on the Federal Reserve’s rate cut path, ahead of Friday’s all-important jobs report. Earlier on Thursday, data showed overall inflation cooled to its lowest level since early 2021, supporting the case for a slower pace of interest-rate cuts. That came on top robust economic-growth numbers on Wednesday that prompted traders to trim bets on rate cuts. The Fed is set to meet next week.

Higher Volatility

Surging volatility across emerging markets this month has hit carry-trade returns. A Bloomberg index that measures such returns from eight emerging markets, funded by short positions in the dollar, has dropped more than 2% in October, on track for the worst monthly performance since September 2022.

“Paradoxically, after the Federal Reserve cut rates by 50bps in September and signaled further cuts this year and in 2025, bond yields rose sharply as investors got worried about politicians’ lack of concern over the large and persistent US budget deficit,” Gama’s De Mello added. “US growth data surprised positively and the worries around an increase in US tariffs hurt currencies. China also failed to clarify many of its announced policies.”

Traders are bracing for more volatility ahead of next week’s US vote, with the cost of hedging dollar moves over the next week reaching its highest level since early 2020. In emerging markets, the Mexican peso, the Chinese yuan and South Korea’s won look vulnerable.

Elsewhere, Eva Zamrazilova, deputy governor of the Czech National Bank, is considering pausing interest-rate cuts due to potential inflationary risks. The koruna rose against the dollar on Thursday.

--With assistance from Nicolle Yapur.

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