LONDON (Aug 23): South Africa's rand led emerging market currency losses on Thursday, down more than 1% after US President Donald Trump tweeted his concerns on land reform, while the rising risk of further US sanctions on Russia knocked the rouble.
Emerging currencies were on the backfoot anyway as the dollar index rebounded 0.3% in the wake of minutes from the US Federal Reserve's last meeting indicating it would raise rates in September.
The rand took the brunt of the selling, down 1.4%, after Trump tweeted late on Wednesday that he would ask his Secretary of State Mike Pompeo to look closely at changes to land reform proposed by the ruling African National Congress (ANC) party.
The ANC is forging ahead with plans to change South Africa's constitution to allow the expropriation of land without compensation, and Trump's comments have inflamed the debate.
South Africa sovereign dollar bonds fell across the curve while five-year credit default swaps rose 8 basis points (bps) from Wednesday's close to 215 bps according to IHS Markit data.
"The market has become a little too obsessed with tweets," said Cristian Maggio, head of emerging markets strategy at TD Securities.
"I am concerned about land reform but I don't see why markets should be more concerned if Trump is asking Pompeo to check what's happening — it's a purely domestic sovereign matter for South Africa."
Russia's rouble was the other big faller, down 1.1% after its weakest close since 2016, and heading towards its lowest in more than two years as traders priced in a growing risk of more US sanctions.
"It's a concern and keeping the rouble weak, and it is likely to be the case until the US midterm elections as the fiery rhetoric has been stepped up," said Maggio.
"The risk is we are getting into a completely new area in terms of the extent and reach of the sanctions as so far they have been aimed at individuals and specific firms and not at hitting government debt directly."
Russian stocks also remained under pressure, with dollar-denominated shares down 1.2%.
Russia's economy minister acknowledged that new US sanctions would pressure the rouble and fuel capital outflows over the next 12 months, recognising the need to trim the economic growth forecast.
In a sign of the widespread fear among banks of reprisals from Washington for working with targeted Russian individuals and entities, Credit Suisse froze roughly US$5 billion of assets linked to Russia.
The Turkish lira also fell another 0.8% after Ankara accused Washington of waging "economic war" and failing to respect its legal system over the fate of an American pastor whose trial in Turkey has soured relations between the NATO allies.
Trump's national security adviser John Bolton said Turkey had made a "big mistake" in not freeing pastor Andrew Brunson.
Emerging equities also struggled as more tit-for-tat tariffs were imposed in the ongoing trade dispute between the United States and China, even as officials from both sides met to try to resolve the damaging conflict.
MSCI's benchmark emerging stocks index was effectively flat on the day, with ratings agency Moody's warning that the trade war was a risk to global growth.
"Emerging market countries remain inherently vulnerable to the risk of capital outflows associated with tightening global liquidity as advanced economy central banks reverse their quantitative easing measures," Moody's added.
Chinese mainland shares gained 0.3% but Hong Kong fell 0.5% and emerging Europe bourses delivered meagre gains with Poland and Hungary stocks up 0.3-0.4%.