Photographer: Shawkat Khan/AFP via Getty Images

Emerging Markets Drop as Global Growth Concern Damps Risk Demand

  • MSCI equity benchmark retreats the most in seven weeks
  • Currencies weaken after Fed's Rosengren sounds hawkish note

Emerging markets retreated, with equities falling the most in seven weeks, as deepening concern that global growth is faltering reduced demand for riskier assets in developing nations.

Energy stocks slid for a third day as Brent crude closed for less than $38 a barrel in London after touching the lowest price since March 4. The rand led currencies lower as concern mounted that South Africa’s credit rating may be cut and lawmakers rejected a motion to impeach President Jacob Zuma. South Korea’s won and Turkey’s lira retreated after hawkish comments from a Federal Reserve official on Monday. The premium investors demand to own developing-nation bonds climbed to a one-week high.

Developing-nation assets have dropped this month as commodity prices weakened and investors assess the outlook for higher U.S. interest rates. International Monetary Fund Managing Director Christine Lagarde said risks to the global recovery were growing and an unexpected drop in German factory orders signaled a trade slowdown was hurting Europe’s biggest economy. Boston Fed President Eric Rosengren said on Monday that market expectations for just one U.S. rate increase this year may be too pessimistic.

“A more hawkish move in U.S. rates would weaken emerging-market currencies against the dollar,” said Michael Wang, a strategist at hedge fund Amiya Capital LLP in London, who favors shares in India, Mexico and Poland. “This, in turn, would negatively impact emerging-market equities. The move lower in oil is also weighing on emerging markets.”

Currencies

The MSCI Emerging Markets Currency Index fell 0.6 percent. The gauge has declined 0.9 percent in April after surging 5.2 percent in March, the best month since records began in 1999. 

The rand weakened 2.1 percent against the dollar. Deputy Governor Daniel Mminele on Monday warned risks to South Africa’s ratings are rising before a Standard & Poor’s conference on the nation’s credit outlook. The currency extended declines after lawmakers voted 233-143 against impeaching Zuma for refusing to repay state funds used to upgrade his private residence.

The won and lira each weakened 0.8 percent. The Mexican peso slid 1.2 percent and the Colombian peso dropped 0.7 percent. Brent crude rose 0.5 percent to $37.87 a barrel, narrowing its decline from this year’s high to 8.4 percent.

India’s rupee fell for the first time in seven days, losing 0.4 percent. The central bank cut interest rates on Tuesday to a five-year low to support the economy.

Stocks

The yuan traded offshore retreated 0.2 percent while the rate in Shanghai increased 0.1 percent. The People’s Bank of China weakened its daily reference rate, which restricts onshore moves to 2 percent on either side, by 0.12 percent, the most since March 24. Chinese markets were shut for a holiday on Monday.

The MSCI Emerging Markets Index dropped 1.7 percent, taking its decline in April to 2.9 percent following a 13 percent surge in March. All 10 industry measures fell on Tuesday, led by a 2.2 percent drop in energy stocks. The benchmark gauge trades at 11.5 times the average projected 12-month earnings of its members, compared with a multiple of 15.6 for developed-nation stocks, which have dropped 1.8 percent this month.

The Hang Seng China Enterprises Index in Hong Kong declined 1.9 percent to the lowest since March 16. Benchmark gauges in South Africa, Poland and Turkey each declined at least 1.2 percent.

Yield Spread

The Shanghai Composite Index advanced 1.5 percent amid speculation government efforts to spur the economy will support the market. India’s Sensex Index dropped 2 percent, the most since Feb. 11.

The Ibovespa rose 0.6 percent as speculation mounted that Brazil’s president will be impeached and a new government will be better able to pull the country out of a recession. Petroleo Brasileiro SA, the state-run oil company, led the stock benchmark higher, increasing 3.3 percent.

The extra yield investors demand to own emerging-market debt over U.S. Treasuries increased seven basis points to 415, according to JPMorgan Chase & Co. indexes.

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