Global Recession Fears Trigger Emerging Market Equities Selloff

Emerging market equities tumbled on Monday due to recession fears in the U.S., causing a global selloff. The MSCI index lost 4.1%, influenced by falling Japanese stocks and tech sector concerns in Asia. Traders anticipate a 50 basis points rate cut by the Federal Reserve in September.

Emerging market equities around the world tumbled on Monday as fears of a recession in the United States sparked a global selloff, sending investors flocking to safer assets like the Japanese yen. The MSCI's index of global emerging market stocks declined by 4.1%, pressured by a free-fall in Japanese stocks that cascaded across Asia, along with concerns about technology sector earnings in Taiwan and South Korea.

The risk-off sentiment from Friday persisted, fueled by weaker-than-expected U.S. jobs data that heightened recession worries in the world's largest economy. Moreover, compounding fears about emerging markets included issues in China, poor earnings in the tech sector, and geopolitical tensions in the Middle East.

Traders are now pricing in a 50 basis points interest rate cut by the Federal Reserve at its September meeting, up from the 25 basis points cut that was expected last week. "The overnight moves in Asia caused some panic selling, and in August's thin liquidity, nobody really knows which pebble caused the avalanche," said Patrick Reid, co-founder of FX consultancy The Adamis Principle.

South Korean stocks experienced their worst session since the global financial crisis of 2008, triggering circuit breakers for the first time since March 2020. The selloff extended to emerging market bourses in Europe and the Middle East. Trading on Turkey's BIST-100 index was halted twice on Monday following significant pre-market losses. The index dropped 3.8%, with bank stocks falling 4.2% as the lira reached a record low against the dollar.

Meanwhile, the yen surged to a seven-month high against the dollar, leading to the unwinding of crowded carry trades and pressuring high-yielding emerging market currencies. A rebound in the yen, a favorite funding currency for carry trades, also weighed on the U.S. dollar, boosting other emerging market funding currencies like China's yuan.

"The good times are over as we are seeing clusters of risk-off unwinds in carry trades, a trend likely to continue at least into Q4," Reid noted. Malaysia's ringgit also extended its strong performance, reaching its highest point against the dollar since April 2023.

A 0.5% decline in the dollar helped MSCI's emerging market currency index rise by 0.3%, with European emerging market currencies also recovering ground against the greenback. Contrarily, high-yielding EM currencies saw declines, with the Indian rupee becoming the worst-performing Asian currency this year, while the Mexican peso dropped to its lowest level since October 2022.

On the data front, Turkish annual inflation fell to 61.78% in July, slightly below expectations, while Czech retail sales increased by 4.4%.

(With inputs from agencies.)