EM stocks fall before key earnings, Brazil in focus as Lula wins

Emerging-market stocks started the week lower as investors awaited earnings from some of the world’s biggest technology companies for clues on whether the artificial intelligence trade can recover from a bruising selloff.

MSCI’s index for developing-world stocks dropped 0.3% on Monday, extending last week’s 2.6% decline. The Kospi and Hang Seng Tech index both fell at least 1% intraday. A similar index for EM currencies added 0.1%, while a Bloomberg dollar gauge edged lower.

Microsoft, Alphabet and Amazon.com are due to report this week, putting the AI theme in focus as investors look for evidence that massive spending on the technology will pay off. In a sign of how nervous investors are, Meta Platforms shares dropped last week even after the company said it would set up investment in AI. Goldman Sachs Group Inc. strategists cut their target for South Korea’s Kospi Index, home to some of the biggest AI firms, by 25%.

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“AI concerns continue to impact Korea, Taiwan and China tech continues to reprice lower with the battery sector very weak on concerns about slowing growth in that market,” said Rajeev De Mello, global macro portfolio manager at Gama Asset Management SA. “Brazil is adding another source of uncertainty to what was an uncertain last week.”

Traders are bracing for steep losses across Brazilian markets Monday after President Luiz Inácio Lula da Silva staged a stunning comeback to defeat Flávio Bolsonaro, the right-wing candidate favoured by many investors. An ETF tracking Brazilian equities tumbled as much as 16% in Japan, the most intraday since 2020, and a currency derivatives contract on the CME exchange showed the real at 5.55 per dollar.

Bolsonaro called for annulment of the result, accusing the Supreme Court of changing the rules when it mandated a last-minute extension of voting hours.

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“Bolsonaro’s decision to contest the result raises the prospect of prolonged political uncertainty, adding to the pressure on Brazilian assets,” De Mello said.

Adding to an already event-heavy week are policy decisions by major central banks including the Federal Reserve and the Bank of Japan in the coming days. Their deliberations on interest rates come in the backdrop of global inflationary pressures, higher bond yields and volatility in energy markets due to the ongoing US-Iran war.

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