Emerging Stocks, Bonds Fall on Europe Crisis; China Shares Sink

Emerging-market stocks and bonds fell, extending monthly declines, on concern Chinese interest- rate increases and Europe’s debt crisis will slow global growth.

The MSCI Emerging Markets Index dropped 0.6 percent to 1,073.80 at 9:01 a.m. in New York, heading for the biggest monthly retreat since May. JPMorgan Chase & Co.’s EMBI+ Index of emerging-market government debt in dollars sank 0.6 percent, set for the steepest monthly drop in two years.

The MSCI emerging-stock index has lost 2.9 percent in November and the JPMorgan bond gauge has slid 3.5 percent as investors speculated China’s efforts to curb the highest inflation rate in two years and Europe’s spending cuts will erode demand for emerging-market exports. The Shanghai Composite Index sank 1.6 percent today after a Chinese Academy of Social Sciences economist said the government needs to raise borrowing costs by 2 percentage points.

“The possibility of China raising interest rates in the short term seems much more possible, and that’s triggering the selling pressure,” said Castor Pang, Hong Kong-based research director at Cinda International Holdings Ltd. “Concerns about the European debt crisis are continuing to deteriorate confidence in the market.”

The Shanghai Composite gauge posted its first monthly drop since June after Zhong Jiyin, an economist with the Chinese Academy of Social Sciences, wrote in a commentary in the China Daily today that recent increases in banks’ reserve requirements won’t be enough to reverse excessive liquidity in the system.

Euro Weakens

China’s central bank raised benchmark lending and deposit rates in October and policy makers ordered banks to set aside larger reserves this month after consumer prices rose 4.4 percent in October.

China Construction Bank Corp. declined 1.7 percent in Shanghai trading today, while Industrial & Commercial Bank of China Ltd. lost 2.1 percent.

The euro weakened for a third day on concern Portugal and Spain may suffer the fate of Ireland, which had to ask for an 85 billion-euro ($111 billion) rescue package to help bail out its banks.

Hungary’s bonds tumbled for a seventh day, lifting five-year yields to the highest since September 2009, as a row between the central bank and the government over interest rates undermined investor confidence.

The central bank increased the benchmark interest rate yesterday after holding it at a record low for six months and said further monetary tightening may be needed to contain inflation. The rate increase was “unjustified,” the Economy Ministry said in a statement.

Default Swaps

The yield on government bonds in forint due February 2015 jumped 20 basis points to 8.38 percent. The cost of insuring against non-payment of sovereign debt climbed to the highest since June, based on credit-default prices from CMA.

The extra yield investors demand to own emerging-market government bonds over U.S. Treasuries widened 12 basis points to 2.78 percentage points today, the highest level in two months, according to JPMorgan’s EMBI+ Index.

South Korea’s won fell 0.6 percent to 1,159.25 per dollar, leading declines in emerging-market currencies and completing its biggest monthly loss since May. The currency reached 1,172.50 on Nov. 24, the weakest level since Sept. 9, after North Korea’s artillery attack the day before on the South’s Yeonpyeong island.

‘Paring Back Risk’

Four people died in the shelling and South Korean President Lee Myung Bak said yesterday that Kim Jong Il’s regime will “be made to pay for any further provocation.”

“Everyone’s still paring back risk as there’s a lot of uncertainty in the world right now,” said Stuart Oakley, the Singapore-based head of emerging-markets foreign exchange for Asia at Royal Bank of Scotland Plc. “We are still seeing better buying of dollars.”

The Bombay Stock Exchange Sensitive Index rose 0.6 percent today and shares of DLF Ltd., India’s biggest developer, surged 7.1 percent. India’s gross domestic product increased 8.9 percent in the three months through September from a year earlier, the Central Statistical Organisation said in a statement in New Delhi today. That was more than the 8.2 percent median estimate of 30 economists in a Bloomberg News survey.

Poland’s zloty strengthened 1.2 percent against the euro and the nation’s benchmark WIG20 Index of shares climbed 0.6 percent. Gross domestic product expanded at an annual rate of 4.2 percent in the third quarter, the Warsaw-based Central Statistical Office reported, the fastest pace in two years. The figure exceeded the 3.6 percent median estimate of 14 economists in a Bloomberg survey.

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