LONDON, May 7 (Reuters) – Investors dumped emerging stocks and bonds on Thursday, as German and U.S. bond yields hit multi-week highs, pushing equity indexes down 1-2 percent and fuelling heavy currency losses.
As outflows gathered pace from emerging assets, options markets showed implied volatility – a gauge of expected exchange rate swings – spiking to multi-month highs on currencies ranging from the Korean won to Polish zloty.
MSCI’s main emerging equity index lost 1.4 percent, touching a one-month low, while Asian shares excluding Japan lost 1.6 percent, led by a 2.75 percent rout on Chinese stocks. India, one of the best equity performers in the past year, suffered its biggest daily fund outflow in more than a year on Wednesday
In emerging Europe too, most bourses lost ground, with Russia, so far supported by an oil price rally, also falling more than 1 percent.
"It is a bit of a bloodbath in equity markets. There are several things going on … the rise in oil prices, inflation expectations. Bond yields globally, including in emerging markets, have gone up and equity markets have come off the boil," said Neil Shearing head of emerging markets research at Capital Economics.
"I think this could be a soft patch for markets, lasting a few weeks."
Bonds fell across the board, forcing Poland to cancel its weekly bond auction. Polish five-year yields at the highest since end-August 2014, a rise of more than 50 bps this month .
Hungarian five- and ten-year yields surged 13 and 22 bps respectively . Indian and South African yields jumped to multi-month highs.
"The developed market bond sell-off is undoubtedly hurting long emerging local bonds positions, especially with duration five-years or longer," Standard Bank said in a note.
The analysts said however that the unwinding of long dollar positions could help emerging currencies, noting that "those who avoided non-dollar assets for fear of continuing dollar strength will now look to EM for extra yield."
For now however, the outflows from bonds and stocks were pressuring emerging currencies, with the Indian rupee down 1 percent to nearly 20-month lows against the dollar while the rand and the lira fell 0.6 percent .
The zloty and forint also fell sharply against the rising euro though the regional safe haven the Czech crown firmed 0.15 percent ahead of a central bank meeting that should leave policy unchanged.
Currencies may face more pain ahead. One-month implied volatility, derived from options prices, was at the highest since December on the Indian rupee and picked up to five-week highs on the Korean won.
Euro-zloty volatility was at a three-month high . A rise in implied volatility raises the cost of hedging against further currency swings.
Indonesia’s central bank was spotted intervening on rupiah markets as the currency fell to seven-week lows.
Hard currency emerging debt was more resilient as yield spreads tightened 4 basis points to 357 bps over Treasuries, the tightest since October 2014.