LONDON: India was the weak link in emerging markets on Monday after a regional election defeat for the pro-business ruling party while mounting expectations of a U.S. rate rise pushed emerging shares to one-month lows.
The dollar stands near seven-month highs and 10-year U.S. bond yields have surged as strong jobs growth last month and a drop in the unemployment rate to April 2008 lows have increased the likelihood that the Federal Reserve will raise rates in December for the first time in almost a decade.
MSCI’s emerging equity index fell almost 1 percent while Hong Kong-listed Chinese shares closed down 0.6 percent, shrugging off buoyant mainland markets that were celebrating the resumption of new share listings .
Indian shares, bonds and currencies – investor favourites this year – slumped to six-week lows after Prime Minister Narendra Modi’s defeat in Bihar state elections raised concerns over the fate of key policy reforms.
The rupee lost 0.4 percent, with the central bank spotted intervening to stem the currency’s losses, while equities fell as much as 2.3 percent before closing just over 1 percent lower. Bond yields rose to six-week highs.
Ilan Solot, a strategist at Brown Brothers Harriman, said that while a Fed move was a headwind, emerging markets had broadly priced this in and would also focus on other issues.
“I don’t see any reason to think that EMs will be terribly hurt by this – the market is … reacting to a stronger dollar. But it isn’t a continuous negative development, you adjust to it and move on,” Solot said.
The markets’ optimism on India was being tested, Solot said, adding: “The question is whether India will slip back into the old paradigm of inaction – that’s the problem.”
Analysts at Citi told clients: “It is a political pothole – a bump that you usually ride out of with some temporary discomfort (though you do start looking at the road more closely).”
Politics also hurt Croatian assets, with the kuna down 0.2 percent after weekend elections that yielded a hung parliament. Five-year credit default swaps rose 2 basis points (bps) to 308 bps, the highest since December.
Egyptian CDS meanwhile hit 18-month highs as fears grew for the tourism-reliant economy after investigators said the recent air disaster that killed 224 Russian tourists was likely caused by a bomb.
Egypt’s 2020 dollar bond fell half a cent in price to the lowest since August 2014, while the 2025 issue is at a record low of 91 cents in the dollar, Tradeweb data showed .
Shares in South Africa’s MTN tumbled more than 1 percent and bond prices fell over half a cent after the resignation of its CEO following the imposition of a $5.2 billion fine by Nigeria.
The rand lost 0.8 percent against the dollar.
Most other emerging currencies also retreated, with the Turkish lira and Russian rouble losing 0.4 percent .