(Bloomberg) -- Emerging-market stocks plunged Monday, falling the most in more than three weeks, as US President Donald Trump’s latest executive order targeting China stirred up a new round of risk aversion.
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MSCI Inc.’s benchmark for EM equities ended the day 1% lower, after rallying 10% in the past six weeks driven by bets that Chinese technology companies, especially Alibaba Group Holding Ltd., are making strides in artificial intelligence. That had taken the index’s valuation to a four-month high, positioning it near highs that have sparked selloffs over the past two years.
Over the weekend, Trump directed the Committee on Foreign Investment in the US to restrict Chinese spending on technology, energy and other strategic US sectors, his administration’s latest salvo against the world’s second-largest economy. The administration also called on Mexican officials to place their own levies on Chinese imports and proposed fees on the use of commercial ships made in China.
Alibaba Group Holding Ltd. closed down 10% in US trading on Monday and was one of the biggest contributors to the dip in the emerging-market equities gauge. Tencent Holdings, Taiwan Semiconductor Manufacturing and PDD Holdings also weighed on the index.
While the flurry of executive orders narrowed the negotiating room for China over trade tariffs, the country also faced more urgent pressures on the domestic front. Tightening liquidity is leading to a surge in money-market rates, a squeeze worsened by local governments’ borrowing to replace off-balance sheet debt. Investors are fretting over signs that the People’s Bank of China is pausing accommodative measures and authorities aren’t following through on policy pledges.
Currencies Gain
The Mexican peso slipped as much as 0.3%, while MSCI’s gauge for developing currencies nearly erased Monday’s gains after Trump said tariffs on Mexico and Canada are going forward on time.
Currencies in Eastern Europe and Asia gained after Germany’s election results boosted the euro and weighed on the dollar. The Hungarian forint and Czech koruna outperformed as 17 out of 23 EM currencies tracked by Bloomberg moved higher. Latin America lagged as Trump’s tariff threats lingered.
Barclays’ strategists view the dollar’s current soft patch as mainly driven by near-term tactical and temporary factors.
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“We expect markets to trade in a range in the coming months, as uncertainty stays high,” according to strategists including Audrey Ong, Mitul Kotecha and Lefteris Farmakis. “Inflation and global risks are likely to keep markets from pricing in more rate cuts for now, as EM needs premium, especially with a Fed that is in no rush.”
Ukraine’s sovereign bonds trimmed gains as the prospect for peace in the country became increasingly unclear. On Monday, the US voted against a Ukraine-backed resolution in the UN General Assembly, signaling a deepened split by Washington with its allies over the peace talk.
Senegal’s sovereign dollar bonds posted some of the biggest losses among EM peers after Moody’s Ratings lowered the country’s credit rating to six levels below investment grade.
Elsewhere, Saudi Arabia mandated banks for a potential sale of a green bond, with a seven-year security in euros. It also sought to sell a 12-year bond.
--With assistance from Rheaa Rao.
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