(Bloomberg) -- A global risk-off wave sparked by concerns over Europe’s banking system spilled over into emerging markets Friday, sending stocks and currencies to their first declines in four days. Sovereign risk premiums climbed amid a dash to safety.
The MSCI Emerging Markets Index fell 0.7%, paring a weekly gain, with financial shares accounting for almost a third of the decline. Investors are cutting exposure to banks they see as vulnerable after Federal Reserve Chair Jerome Powell and US Treasury Secretary Janet Yellen acknowledged threats to the financial system. Equities in Greece and Eastern Europe posted some of the biggest losses.
Tightening monetary conditions in the wake of interest-rate hikes by global central banks is exposing hidden weaknesses in the banking system of rich nations. While emerging markets aren’t directly affected by them, a risk-off rush into haven assets such as the Japanese yen and Treasuries sucks capital out of such assets. Latin American stocks and African bonds have been among the worst performers in the past week.
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“Sentiment certainly feels fragile right now, but as far as emerging markets are concerned, the threat of direct contagion continues to appear contained,” said Ivailo Vesselinov, chief strategist at Emso Asset Management in London. “If the fears about the banking sectors in developed markets continue to escalate, ultimately it would fuel concerns about a harder form of landing for the global economy, at which point sentiment towards EM could also be hit.”
Benchmark measures in Hungary, Poland and Czech Republic each fell more than 2%. MSCI’s subindex for emerging-market financial shares dropped the most since March 14 as Greek banks joined a selloff across Western Europe. Alpha Services and Holdings, National Bank of Greece, Eurobank Ergasias Services and Holdings each fell more than 5%. In the dollar-bond market, investors sold high-yield securities, especially from African nations such as Egypt and Angola, while buying higher-rated names from South Korea and Israel.
Brazil’s stocks dodged a selloff, with the benchmark index rising almost 1%.
The developing-nation currency index slid below its 50-day moving average. The extra yield investors demand to own emerging-market sovereign bonds rather than US Treasuries widened 9 basis points to 509, according to JPMorgan Chase & Co. data. That erased a weekly drop in the spread.
Investors have been reeling from a series of bank collapses that prompted intervention from regulators around the world and sparked volatility in global markets.
Bond traders on Friday abandoned wagers that the Federal Reserve will raise interest rates in May and added to bets that its next shift will be a rate cut as early as June as the US approaches a recession. That’s helping to mitigate a selloff in emerging-market bonds.
(Updates throughout with latest market moves, new quote)
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