Text size The classic emerging-markets nightmare seems to be playing out as the Argentine peso collapsed to a record low against the dollar, forcing the central bank to raise interest rates to an unprecedented 60%. The emergency move again raised the question of whether this crisis could spark a wider fallout, sending emerging markets tumbling. Yet, strategists still favor emerging markets. Argentina today has supplanted Turkey’s currency crisis in the news cycle, although both countries barely register as blips in broader emerging-market indexes. Their problems are specific to them, and are unlikely to be resolved anytime soon. The odds of a recession in Argentina later this year are rising while Turkey is headed for an inevitable “substantial deterioration” in its creditworthiness and the country's economy is set for a hard landing, according to a note from Jon Harrison, part of the emerging-markets team at TS Lombard. Diego Giudice/Bloomberg The bigger issue is that the troubles in Argentina and Turkey are coming at an inopportune time. Emerging markets are getting hit from multiple directions. The tightening monetary policy in the U.S. is pressuring emerging-market currencies and dollar-borrowers. Escalating trade tensions between the U.S. and China and a summer wobbling in the Chinese renminbi saw emerging economies take a hit. There are also country-specific problems, such as sanctions on Russia and uncertainty ahead of Brazil’s elections. “That means the risk of contagion and the magnitude of those effects is bigger also,” Robin Brooks, chief economist of the Institute of International Finance tells Barron’s. Another note of caution from Brooks, as other countries may need IMF assistance: The IMF safety net as a cushion to emerging-market assets is perhaps less effective until the bailout program gets sized properly. Brooks says the programs tend to be made too small at the beginning. Yet, many strategists are staying put in emerging markets – even if they are being more selective. Citi Private Bank's Global Investment Committee maintained its overweight recommendation in emerging markets, favoring Asia and Latin America, even as is neutral on developed markets. The iShares Emerging Markets index ETF (EEM) is down 2.7% this afternoon to $42.91. One possible reason to stay invested in developing economies: It's better than the alternatives. Gavekal Research Chief Executive Louis-Vincent Gave wrote in a report that investors can’t rule out the political risk facing Europe from a disorderly “no deal” Brexit, which would be “catastrophic” for Britain and disruptive for the European Union. Add in what Gave describes as an “anti-EU rebellion” in Italy with its new populist government, the risks are now “dangerous enough and close enough to deter any wholesale reallocation of assets to Europe.” By the process of elimination, Gave also favors emerging markets — especially China — if investors decide to shift some money out of the U.S. as he sees “irrational exuberance about U.S. assets and their irrational despondency about emerging markets." Sign up to Review & Preview, a new daily email from Barron’s. Every evening we’ll review the news that moved markets during the day and look ahead to what it means for your portfolio in the morning.<doc-sep>LONDON, Aug 30 (Reuters) - Emerging currencies sold off sharply again on Thursday after Argentina’s peso suffered its biggest one-day decline since 2015 overnight, with Turkey’s lira, the South African rand and the Indian rupee all feeling the heat. The Argentine peso crashed over 7 percent after a collapse in investor confidence in President Mauricio Macri’s government. The central bank intervened to try and stabilise the peso, but the currency still closed at a record low of 34.10 per dollar. The International Monetary Fund (IMF) said it was studying Argentina’s request to speed up disbursement of a $50 billion loan programme. “The external environment has deteriorated since the programme was agreed, so more policy effort may be needed in return for a rephasing of the arrangement,” said Stuart Culverhouse, chief economist and global head of fixed income research at Exotix Capital. “While this should still be viewed as positive, it demonstrates how fragile and exposed Argentina remains just two months after its IMF agreement.” Piotr Matys, an emerging markets strategist at Rabobank, added that the peso’s continuing fall despite the IMF programme only proved how difficult it was to restore investor confidence once it was lost: “It’s a major warning signal for Turkey.” The Turkish lira tumbled 1.9 percent to a two-week trough in its fourth straight day in the red. Turkish five-year credit default swaps rose 8 basis points (bps) from Wednesday’s close to a two-week high of 516 bps, according to IHS Markit. Ratings agency Moody’s sounded the alarm about Turkish bank debt earlier this week. However, Turkey’s finance minister was quoted as saying he saw no big risk to the economy or financial system. Turkish stocks fell 0.6 percent and Turkish bank shares were down 1.1 percent. Matys noted Turkey hadn’t announced any new measures to restore investor confidence since last week’s holiday. “If anything, recent comments from officials indicate they are confident that the measures they have implemented so far will prove sufficient, which is not the case,” he said, adding investors still wanted to see a proper rate hike and tighter fiscal policy. South Africa’s rand fell 1.6 percent and stocks slipped 1.2 percent after telecom group MTN’s shares plunged over 22 percent to their lowest level since 2009. The moves followed an order from Nigeria that MTN return $8.1 billion. In Asia, India’s rupee slipped 0.3 percent to another record low and the Indonesian rupiah hit a near three-year low. China’s yuan weakened 0.2 percent, erasing all the gains it has made this week following the central bank’s latest move to stabilise the currency. Chinese mainland stocks fell over 1 percent and Hong Kong lost 0.9 percent. U.S. tariffs on another $200 billion of Chinese goods are expected to take effect later next month. In one bright spot, U.S. President Donald Trump has signed a proclamation allowing targeted relief from steel quotas on South Korea, Argentina and Brazil, and from aluminium quotas on Argentina. This did little to arrest the selling, however, with MSCI’s benchmark emerging equities index down 0.5 percent. Twenty out of 23 emerging market stock indexes are trading below their 200-day moving average, a technical analysis showed, suggesting further downside risks. For GRAPHIC on emerging market FX performance 2018, see tmsnrt.rs/2e7eoml For GRAPHIC on MSCI emerging index performance 2018, see tmsnrt.rs/2dZbdP5 For TOP NEWS across emerging markets For CENTRAL EUROPE market report, see For TURKISH market report, see For RUSSIAN market report, see) Emerging Markets Prices from Reuters Equities Latest Net Chg % Chg % Chg on year Morgan Stanley Emrg Mkt Indx 1065.40 -5.13 -0.48 -8.03 Czech Rep 1078.46 -0.39 -0.04 +0.03 Poland 2360.79 -19.89 -0.84 -4.08 Hungary 37051.47 -183.39 -0.49 -5.91 Romania 8344.73 +11.80 +0.14 +7.62 Greece 737.90 -5.06 -0.68 -8.03 Russia 1085.91 +0.90 +0.08 -5.94 South Africa 53408.58 -622.02 -1.15 +1.67 Turkey 93280.71 -586.23 -0.62 -19.12 China 2737.74 -31.56 -1.14 -17.22 India 38658.44 -64.49 -0.17 +13.51 Currencies Latest Prev Local Local close currency currency % change % change in 2018 Czech Rep 25.74 25.72 -0.09 -0.84 Poland 4.29 4.29 -0.10 -2.67 Hungary 326.52 325.58 -0.29 -4.90 Romania 4.64 4.63 -0.28 +0.78 Serbia 118.13 118.22 +0.08 +0.23 Russia 68.17 67.86 -0.45 -15.41 Kazakhstan 363.57 363.57 +0.00 -8.46 Ukraine 28.27 28.10 -0.60 -0.44 South Africa 14.59 14.34 -1.74 -15.32 Kenya 100.50 100.60 +0.10 +2.59 Israel 3.62 3.61 -0.20 -3.80 Turkey 6.56 6.45 -1.73 -42.26 China 6.84 6.82 -0.23 -4.81 India 70.78 70.53 -0.35 -9.82 Brazil 4.11 4.11 +0.01 -19.34 Mexico 19.07 18.95 -0.62 +3.04 Debt Index Strip Spd Chg %Rtn Index Sov’gn Debt EMBIG 389 2 .02 7 70.27 1<doc-sep>
A man holds Argentine pesos outside a bank in Buenos Aires. Marcos Brindicci | Reuters Emerging markets were rattled again, with the Argentine peso, Turkish lira and Indonesian rupiah tumbling overnight. The negative sentiment is set to weigh on other Asian currencies, although they will remain fairly resilient to the impact, analysts say. The peso crashed nearly 12 percent, following a domestic crisis which saw its central bank hike rates to 60 percent in an attempt to shore up its currency. Extending its steep losses this year, the lira fell 2.94 percent to a fourth straight day of declines. In Asia, India's rupee fell to a new record low against the dollar on Friday — a more than 11 percent fall since the start of the year, and the Indonesian rupiah hit a near three-year low. "Emerging markets will remain pressured by the Argentine peso and Turkish lira crises," DBS analysts said in a note Friday morning. The peso is down more than 45 percent against the greenback this year. "Argentina has hiked rates to a record 60% to address double-digit inflation, but this would exacerbate the recession, and coupled with budget/current account deficits of around 5% of GDP, have increased the risk of for the government to default on its debt," they added. The MSCI Emerging Markets Currency Index has declined 2.1 percent since the start of August, and has tumbled 5.1 percent since the beginning of this year. Impact on Asian emerging currencies The currency crises may lead to some follow-through losses in Asia, but overall, the negative sentiment will not weigh as heavily compared to other factors, experts say. The weakest currencies in Asia — the Indian rupee, the Indonesian rupiah and Philippine peso — will likely be under some pressure, they say. "Here in Asia, the usual suspects are feeling some heat, though not as intensely. But the backdrop does reinforce the need for Bank Indonesia and the Philippine central bank to follow through with the additional rate hikes we are forecasting this year," ING's Robert Carnell, chief economist head of research for Asia Pacific, said in a note Friday morning. DBS analysts noted that "while not immune, Emerging Asia has been resilient" to the Argentine peso and lira crises. They pointed to the depreciation in the rupee, rupiah and Philippine peso as being more "modest" compared to the fallout in the Argentine peso and lira, so far this year. "Even so, Asia needs to guard against complacency," they cautioned. "These three currencies have been struggling with rising US rates since the start of the year due to deficits in their fiscal and current account balances. With heightened trade tensions threatening to erupt into a full-blown trade war, the region is on alert for disorderly capital outflows (that) could lead to financial instability, especially in countries that have high external debt levels," they added in the note. Irene Cheung, senior strategist for Asia at ANZ, said that rising oil prices will be more of a concern, particularly for countries with current account deficits. That will be a factor that will weigh heavily on emerging currencies, she told CNBC. More expensive oil leads to a higher import bill for countries which are net importers of oil. Higher oil prices also lead to a widening current account deficit — a measure of the flow of goods, services and investments in and out of the country. WATCH: Rupiah and rupee are in the same boat Tariffs and the yuan