Emerging Stocks Drop Most in 2 Weeks on China, Japan Spat

Emerging-market stocks declined, sending the benchmark index (VXEEM) to its biggest drop in almost two weeks, as commodities retreated and concern deepened that a land dispute between China and Japan may curb trade.

The MSCI Emerging Markets Index fell 0.6 percent to 1,006.84, the steepest slide since Sept. 5. Dongfeng Motor (489) Group Co. slumped to an 11-month low, leading losses among Chinese partners of Japanese carmakers. Cairn India Ltd. (CAIR), operator of the nation’s largest onshore oilfield, slid the most since June as oil retreated in New York. Latin America’s largest petrochemicals maker Braskem SA dropped the most this month as Brazil’s Bovespa stock index was unchanged.

Energy companies were the biggest drag on the MSCI index as oil slid for a second day amid concern that demand in the U.S. and Europe will wane as the economies slow. Japanese retailers in China closed their doors to thwart attacks as demonstrations spread over Japan’s plan to buy islands claimed by both countries, which have a $340 billion trade relationship. The MSCI gauge rose to a four-month high on Sept. 14.

“If you were to have a break of trading between these two giants, it is going to affect world growth,” Pablo Goldberg, global head of emerging market research at HSBC Securities Inc., said by phone from New York. “There are risks out there, not just between China and Japan. We had a very potent rally and it is unlikely for us to see a straight line, but the trend is for improvement in appetite for emerging market risk.”

Oil, Commodities Drop

The iShares MSCI Emerging Markets Index (MXEF) exchange-traded fund, the ETF (EEM) tracking developing-nation shares, was little changed. The Chicago Board Options Exchange Emerging Markets ETF Volatility Index, a measure of options prices on the fund and expectations of price swings, slid 4.5 percent.

Oil retreated 1.4 percent in New York, following a 2.4 percent tumble yesterday. The Standard & Poor’s GSCI index of 24 raw materials declined 1.3 percent after losing 2.2 percent the previous day.

Braskem lost 3 percent, the most since Aug. 29. Retailer Lojas Americanas SA (LAME4) declined 2.1 percent.

Rising borrowing costs may force Spain to seek assistance and submit to European Central Bank conditions for aid, ECB Governing Council member Luc Coene said yesterday. The Federal Reserve Bank of New York’s general economic index fell to a three-year low, a report showed yesterday.

Czech Koruna Sinks

The Hang Seng China Enterprises Index declined 1 percent while the BSE India Sensitive Index (SENSEX) retreated 0.2 percent, snapping a nine-day stretch of gains. Russia’s Micex slipped for a second day, falling 1 percent.

The extra yield investors demand to own emerging-market dollar bonds over U.S. Treasuries climbed 4 basis points, or 0.04 percentage point, to 290, according to JPMorgan’s EMBI Global Index.

The Czech koruna weakened 1.6 percent versus the dollar, the biggest drop among emerging market currencies.

Dongfeng Motor dropped 5.1 percent in Hong Kong. Guangzhou Automobile Group Co., which has ventures with Japanese automakers including Toyota Motor Corp., retreated 1.8 percent. A Chinese industry association said some dealerships that sell Japanese cars have shut after outlets were attacked amid the territorial dispute.

‘Further Actions’

Japan “totally caused” the current crisis and should “take responsibility,” China’s Defense Minister Liang Guanglie told reporters in Beijing today in a joint appearance with U.S. Defense Secretary Leon Panetta. “In the future we will very closely watch the evolution with regards to this dispute and we reserve the right for further actions.”

China’s central bank said it’s placing more emphasis on price stability, boosting concern it will delay easing monetary policy even as the economy slows. New home prices in China rose in fewer cities in August, according to data released by the statistics bureau today.

“More time will be needed until investors feel more comfortable with weaker economic readings in China,” Kim Dae Young, a Seoul-based fund manager at KB Asset Management Co., which manages about $26 billion in assets, said by phone today.

Three Chinese bond issuers, including China Development Bank, have delayed or canceled debt sales in the past week amid concern inflation will accelerate.

To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Sridhar Natarajan in New York at snatarajan15@bloomberg.net

To contact the editors responsible for this story: Darren Boey at dboey@bloomberg.net

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