Global Weekly: Equities – emerging markets under pressure

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Global equity markets declined this week, with emerging markets taking the hardest hit. On Monday, unrest around the Turkish lira had a negative effect on equities. The lira depreciated by around 10% against the US dollar that day, but recovered during the week. Turkish policy makers took steps to bolster the financial system and restore investor confidence. The Turkish central bank announced that it would take all necessary measures and lowered the amount of capital that commercial lenders must park at the regulator. On Wednesday, the central bank took measures to restrict short-selling in the currency. The Turkish lira recovered after this announcement. Tensions between the US and Turkey, however, remain high and the Turkish central bank refrains from rate hikes.

Bayer's share price declined by more than 10% on Monday. Investors sold off Bayer shares after a US jury decided that Monsanto, recently acquired by Bayer, has to pay USD 289 million in the first trial over claims that Monsanto's weed killer Roundup causes cancer. This trial was an important test of the evidence supporting other claims related to the herbicide. Recently, the European Union decided to extend the permit to sell Roundup for five years, although the World Health Organisation stated that Roundup probably causes cancer in humans, as well as damage to chromosomes and DNA. Bayer will appeal the verdict.

In emerging markets, Tencent reported results on Wednesday after closing of the Chinese stock exchanges. Tencent is a leading provider of internet-related services in China. Its results were disappointing, with a surprising drop in profit and lower net income. Tencent's gaming business did worse than expected. These disappointing results came after China decided to shut down a game that had just been launched on Tencent’s platform and could have generated a lot of revenues. Tencent's worse-than-expected results not only sent Tencent shares lower but also affected the MSCI Emerging Markets Index, since the weight of Tencent in that index is almost 6%. Naspers shares fell too: this South-African media company holds more than 30% of the outstanding shares in Tencent and has a weight of almost 2% in the MSCI Emerging Markets Index.

Bonds: German Bund yields halt decline

German Bund yields moved sideways this week, ending a decline that set in around the start of the month and was caused by political sorrows in Italy and Turkey. These risk drivers are still dominating the headlines, but the threshold of 30 basis points seems to be a strong resistance for a further Bund rally (bond prices move inversely to yields). Yields only shortly dropped below this point on Wednesday afternoon, but have not been able to defend this advance.

However, it seems unlikely that Bund prices will weaken significantly in the short term. Given the uncertainty around Italy’s budgetary challenges and the high tensions between the US and Turkey, investors continue to regard German Bunds as a 'safe haven'. Additionally, there is a lack of data indicating higher interest rates or inflation, as recent economic results were in line with expectations and central banks’ actions seem to be priced in already with a strong consensus about future steps. Looking at all these factors, it seems likely that Bund yields will continue to move sideways next week and to remain within a narrow trading range.

Volatile peripheral spreads led this week (again) to caution. Spreads on peripheral government bonds versus German Bunds widened, due to the political news flow as well as decreased market liquidity (the fact that liquidity was somewhat lower could be explained by the public holiday on Wednesday in some European countries). With a spread of around 280 basis points compared to Bunds, 10-year Italian government bonds reflect a weakness similar to what we have seen at the end of May.