Emerging market assets weaken again despite China’s rate cut

LONDON – Reuters

AP photo

Emerging market assets resumed their slide on Aug. 26, shrugging off China’s interest rate cut and focusing on growing signs of economic weakness in the world’s second-largest economy and across the developing world.

Oil and metals prices lingered at multi-year lows, keeping pressure on currencies and stock markets and leading markets to give up gains triggered by the Chinese move to cut rates and bank reserve ratio requirements. Analysts reckon the reserve cuts will boost liquidity more than $100 billion.

MSCI’s emerging equities slipped 0.4 percent after indexes in China and Hong Kong closed lower.

Commodity-heavy bourses such as Russia and South Africa fell more than 1 percent.

The losses were tempered by gains in Taiwan and South Korea. The latter posted its biggest one-day advance in two years.

But despite some exceptions such as the won, Taiwan and Singapore dollars, most currencies continued to see heavy pressure. Russia’s rouble fell 0.7 percent and Kazakhstan saw the tenge slump more than 2 percent after the monthly tax period ended. It abandoned its currency peg last week.

The Israeli shekel fell more than 1 percent to five-month lows as expectations grew the central bank would cut interest rates next month to zero to boost growth.

Investors are becoming increasingly pessimistic about emerging markets’ prospects. A weaker China is eroding economic growth, political turmoil is growing in several countries from Turkey to Brazil and steep currency falls risk inflation and reserve depletion.

“We think China will step in further to stabilize the equity market, but even if emerging markets correct further, we will not use it as an opportunity to add to positions,” said Michael Bolliger, the head of emerging markets asset allocation at UBS Wealth Management, which is underweight emerging markets.

“On EM, the fundamental outlook is not great, with subdued growth and political instability, and what we are telling investors is that there is nothing at the moment to change that.”

Data across emerging markets have highlighted those fears. For example, South Africa said this week its economy had shrunk in the second quarter of 2015, raising risks of a recession. Nigerian data on Wednesday showed second-quarter growth slowing to 2.35 percent from 6.54 percent a year ago.

The rand gained 0.4 percent to the dollar after China’s moves but remains close to record lows. Yields at the weekly bond auction rose by 20 to 30 basis points.

The Turkish lira benefited from the prospect of lower oil prices and rose 0.2 percent, after sliding past 3 per dollar for a record low earlier this week. However, Turkish companies are considered vulnerable because of their hard currency debt. The country also faces elections in November that could again lead to a hung parliament.

Emerging market hard currency debt spreads rose 5 basis points over U.S. Treauries to 464 bps, their highest in four years.

Commerzbank analysts advised clients to cut exposure to hard currency debt from countries exposed to China, such as South Africa, Colombia, Chile, Peru and Indonesia, while adding Czech and Polish debt. They recommended buying more Turkish local currency government debt because of lower oil prices.
In central Europe, bourses fell 0.7 to 1.0 percent.

Ukrainian dollar bonds fell to six-week lows around 52 to 53 cents as investors waited to see details of a debt restructuring deal.