Emerging Stocks Drop as Bargain Buying Spurred by China Stalls

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Will China’s Interest Rate Cut Halt the Stocks Slump?

Emerging-market stocks surrendered their gains on Wednesday as concern spread China’s interest-rate cut won’t be enough to undo the damage from the devaluation of the yuan.

The 10th daily drop in the 12 sessions since China’s surprise currency move on Aug. 11 pushed valuations for developing-nation shares to levels that preceded Russia’s invasion of Crimea in March 2014 and the slide in oil prices. The lure of cheaper stocks that propped up prices on Tuesday and early Wednesday proved short-lived as investors speculated it’s too early to start buying.

The MSCI Emerging Markets Index dropped 0.2 percent to 787.30 in New York, after climbing 2.2 percent on Tuesday and rising as much as 0.9 percent earlier on Wednesday. Stocks fell and currencies slumped to a record as investors interpreted the decision by the People’s Bank of China as a signal the world’s second-largest economy may slow down, undermining demand for commodities from countries including Brazil, Russia and South Africa.

“China has a stock market bubble, an economy that is slowing, they have to manage all this, and it’s not going to be a smooth sailing,” said Howard Ward, chief investment officer of growth equities at Mario Gabelli’s Gamco Investors Inc., which oversees $45.4 billion in Rye, New York. “China isn’t growing at 7 percent, maybe it’s growing at 3 percent, and maybe it’s not growing at all -- nobody knows, and this creates a risk as the broader emerging markets are tight to China.”

The gauge of emerging-market equities is valued at 10.3 times the projected earnings of its members, near the lowest valuation since March 11, 2014, and below its five-year average.

$5 Trillion

Chinese equities extended losses since their June 12 peak to $5 trillion as the Shanghai Composite Index recorded the steepest five-day drop since 1996. Policy makers cut rates for a fifth time since November and lowered the amount of cash banks must set aside. That spurred a rally of as much as 4.3 percent before gains fizzled out in the last hour.

An unprecedented government intervention to support the equity market was halted this week as policy makers debated its merits, according to people familiar with the situation. A gauge of Chinese stocks traded in Hong Kong slumped for a ninth day to the lowest level since March 2014.

In New York, the Standard & Poor’s 500 Index climbed 3.9 percent, ending its steepest losing streak in four years. New York Fed Bank President William Dudley said today that the case for raising interest rates in September is less compelling because of international financial and market developments.

Budget Advice

Saudi Arabia’s Tadawul All Share Index retreated after this year’s biggest gain on Tuesday. The country is seeking advice on how to cut billions of dollars from next year’s budget because of the slump in crude prices, according to two people familiar with the matter. Dubai’s DFM General Index slid for a fourth time in five days.

Russia’s Micex Index gained 0.2 percent and the ruble weakened for the ninth time in 10 days. Israel’s shekel slid for a second day. The Bank of Israel may cut its benchmark interest rate below zero if circumstances warrant, Governor Karnit Flug said Tuesday.

The ringgit depreciated for a fifth time in six days as concern about the finances of a state investment firm at the heart of a political scandal worsened the outlook for Malaysia’s economy. A gauge of 20 developing-nation currencies fell 0.5 percent, dropping for the ninth time in 10 days.

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