Emerging Market Stocks and South African Elections Send Ripples Through Global Markets

Emerging market stocks hit near one-month lows due to rising Treasury yields and concerns over U.S. monetary policy. South African markets and the rand plummeted following early election results suggesting the ANC might lose its parliamentary majority, heightening political volatility. Broader EM currencies also declined amid stronger U.S. data.

Emerging market stocks skidded to near one-month lows on Thursday as higher Treasury yields fuelled concerns about restrictive U.S. monetary policy, while the South African rand and stocks slumped as election results trickled in.

The benchmark MSCI EM equities index tumbled 1.3% to its lowest level since May 3, with stock markets in Hong Kong , Taiwan, South Korea and Poland falling between 1.3% and 1.7%. South Africa's benchmark equity index dropped more than 2%, set for its worst day in more than six weeks, after early results from the national election showed the African National Congress (ANC) appeared on course to lose the parliamentary majority it has held for 30 years.

If the final results were to resemble the early picture, the ANC would be forced to make a deal with one or more other parties to govern - a situation that could lead to unprecedented political volatility in the coming weeks or months. The rand, a high-yielding currency that is more susceptible to changes in global mood, fell more than 1% to 18.66 per dollar, its weakest since May 1, while international bonds lost as much as 1 cent in the dollar.

"The initial outcome points towards a more likely chance of the worst case scenario for markets, which would basically be the ANC receiving support in the low 40% range," said James Wilson, EM sovereign debt strategist at ING. "Kind of 42%-43% range, which could eventually mean they have to join a coalition with the likes of the left-leaning Economic Freedom Fighters (EFF), which would certainly be seen by the market as something of a negative outcome."

South Africa's central bank is seen holding its benchmark interest rate at 8.25% later on Thursday, before likely beginning an easing cycle next quarter as inflation retreats back to target. A broader gauge of EM currencies fell 0.2% to an over two-week low as the dollar gained following a recent surge in Treasury yields, driven by stronger-than-expected U.S. data, hawkish comments from Federal Reserve officials and soft demand at bond auctions.

Investors are awaiting U.S. inflation data on Friday to gauge the scale of interest rate cuts this year. Traders are currently pricing just one rate cut from the Fed by the end of 2024. The Russian rouble, the Turkish lira and the Polish zloty all eased against the dollar.

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