Emerging Markets Retreat as Traders Hedge for ‘Risk-Off Event’

(Bloomberg) — A three-day advance in emerging-market currencies and stocks faded as investors shunned riskier assets ahead of the weekend amid fears of more bank troubles.

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MSCI Inc.’s gauges of developing-nation currencies and stocks fell on Friday. Still, the indexes held most of their recent gains and remained on course for their best week since mid-January, with swap markets suggesting the Federal Reserve will stop raising rates, and may even start cutting them later this year.

The “FX world seemed to suggest a bout of risk aversion — or at least preparing for some risk-off event,” Christopher Wong, a foreign exchange strategist at Oversea-Chinese Banking Corp., said in a report. “High-beta proxies,” including South Korea’s won, were the hardest hit on Friday, he said.

Investors have been reeling from a series of bank collapses that prompted intervention from regulators around the world and sparked volatility in global markets. Measures of implied volatility for developing currencies and stocks rose in New York on Thursday.

As the risk of a recession grows, the swap market is pricing in lower interest rates by year-end, despite Fed Chair Jerome Powell’s insistence Wednesday that officials don’t anticipate cutting rates. That’s sending US yields lower and boosting the appeal of emerging-market debt.

The extra yield investors demand to hold developing-nation dollar debt over Treasuries narrowed five basis points to 495 basis points, according to a JPMorgan Chase & Co. index.

“We think that the market has overshot on rates in the short-term,” said Todd Schubert, Dubai-based head of fixed-income research at Bank of Singapore. “Fixed-income performance globally has been driven by rates, and the positive performance is because of the decline in yields.”