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Emerging stocks extend worst drop since June; Mexican peso falls

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Bloomberg

Emerging-market stocks fell, extending their longest selloff since June as investors weighed the outlook for policy accommodation by global central banks. The Mexican peso declined after a poll showed Donald Trump leading in Ohio.
The MSCI Emerging Markets Index slumped for a fourth day as volatility increased. Indonesia led a retreat in shares as benchmarks in China, Malaysia and South Africa dropped while Thailand’s index advanced. The peso depreciated after a Bloomberg survey showed the Republican nominee with a lead over Hillary Clinton in the U.S. battleground state. Russia’s ruble advanced the most in a week as Brent crude rallied. Sovereign bonds fell in Eastern Europe, pushing yields on Hungary’s 10-year government notes to the highest since July.
Investors have backed away from emerging markets after 15 weeks of inflows into exchange-traded funds drove stocks to a 13-month high and bond yields to a three-year low. The future trajectory for developing-country assets depends largely when the Federal Reserve will raise interest rates again, thereby diminishing the appeal of higher-yielding markets.
“Emerging markets have been affected by the nervousness about the upcoming Fed decision,” said Maarten-Jan Bakkum, a senior strategist at NN Investment Partners in The Hague, who recommends buying equities in India and Indonesia. “Capital flows to emerging markets, also the fundamentally weak ones, have been helped greatly by the global search for yield. A more hawkish Fed creates uncertainty about the sustainability of flows.”
The past 10 weeks of inflows to emerging-market debt funds were the biggest ever for a similar period, Bank of America Merrill Lynch Global Research said in a report.

Stocks
The MSCI Emerging Markets Index fell 0.2 percent to 884.06 as of 11.45 a.m. in London, heading for the lowest since Aug. 4 and paring its 2016 gain to 11 percent. It is valued at 12.3 times the 12-month estimated earnings of its members. That compares with a multiple of 15.9 for the MSCI World Index, which has advanced 1.9 percent this year.
All 11 industry groups in the developing nations’ gauge retreated, led by real-estate shares that declined for a fifth day. The measure’s 10-day volatility was near a two-month high of 21 reached Monday.
China’s Shanghai Composite Index slumped 0.7 percent to a month low while the Hang Seng China Enterprises Index of mainland companies listed in Hong Kong lost 0.3 percent. Better-than-expected economic data on Tuesday fueled speculation China’s central bank will refrain from adding monetary stimulus.
South Africa’s FTSE/JSE Africa All Share Index fell 0.3 percent, heading for the lowest in nearly two weeks.

Currencies
The MSCI Emerging Markets Currency Index dropped 0.1 percent to the lowest in nearly two weeks after declining 1.5 percent in the previous three days. The ringgit retreated 0.4 percent. The Malaysian currency has lost 2 percent in three days, headed for its steepest three-day decline since May, as a faltering recovery in crude prices dimmed the outlook for the oil-exporting nation’s finances.
Mexico’s peso lost 0.3 percent, erasing earlier gains, after publication of the poll. Every president elected since 1964 has won Ohio. Mexico’s currency has repeatedly declined when Trump’s election outlook improves because the economy is closely linked to the U.S. and trade between the two countries has grown fivefold to more than $500 billion in goods annually since 1994. The poll was taken Friday through Monday amid renewed concerns about Clinton’s health.
The ringgit dropped to the weakest level since June 27, catching up with the 2.5 percent slide in Brent crude on Tuesday. The yuan rose 0.1 percent as China’s central bank boosted its cash injections to a five-month high, fueling speculation that it is looking to steady the nation’s financial markets. The ruble jumped 0.5 percent as oil looked poised to
recover.

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