Emerging-Market Stocks, Currencies Fall as China Outweighs FedElena Popina and Natasha Doff
Emerging-market assets slid as Vietnam and Kazakhstan weakened their currencies in response to China’s surprise devaluation, outweighing optimism that a U.S. rate rise may not be imminent.
The MSCI Emerging Markets Index retreated 0.9 percent to 840.51 at 4:15 p.m. in New York, widening its slide from this year’s high in April to 21 percent. The stocks gauge trimmed losses after Federal Reserve meeting minutes indicated the central bank has little conviction about raising rates at its next gathering. A developing-nation currency measure, which has fallen for eight straight weeks, lost 0.3 percent, also paring an earlier drop. The yuan weakened in offshore trading.
South Korean equities fell to a six-month low on Wednesday while Taiwanese shares lost 1.9 percent and the Saudi index tumbled 2.5 percent. Vietnam devalued the dong for the third time in 2015 and Kazakhstan, whose biggest trading partners are China and Russia, let its tenge slide 4.4 percent. Turkey’s lira fell to a record for a fifth day, extending declines after an explosion in Istanbul. China’s yuan weakened in offshore trading.
“The Fed is building a case for increasing the rates, but the data is not there yet, which slightly mitigates the deterioration in the sentiment toward the developing nations,” Nicholas Spiro, the managing director of London-based Spiro Sovereign Strategy, said by phone from London. “The Emerging markets are going through a multi-faceted crisis, and the biggest factor that shapes the sentiment is China.”
Fed officials said last month that while conditions for raising interest rates were approaching, they saw more room for labor market healing and need more confidence that inflation is moving toward their goal, minutes of their meeting show. The Fed gathering preceded China’s surprise devaluation on Aug. 11 that prompted some investors to scale back bets on a rate increase in September.
The yuan devaluation piled pressure on managed exchange rates as countries seek to keep their currencies competitive. The State Bank of Vietnam weakened its reference rate by 1 percent to 21,890 dong per dollar and increased the scope for fluctuations to 3 percent on either side.
The Kazakh tenge declined 4.5 percent to 197.28 per dollar, the most since the central bank depreciated it by about 20 percent in February 2014. Central Asia’s biggest crude exporter counts China and Russia as its largest trading partners.
The anticipation of higher U.S. interest rates and a slowing Chinese economy pushed the MSCI Emerging Markets Index into a bear market last week, while a gauge tracking 20 currencies is extending its longest slump since 2000. Global funds are poised to be net sellers in developing Asian equities tracked by Bloomberg for a third straight month, the longest stretch since the middle of 2012.
Combined net sales of stocks in India, Indonesia, the Philippines, South Korea, Thailand and Taiwan by overseas investors totaled $2.7 billion so far in August, following withdrawals of $5.4 billion and $3.2 billion in June and July, according to exchange data compiled by Bloomberg.
“The emerging-market foreign-exchange selloff is likely to slow down because investors have already positioned aggressively in being short EM currencies, and probably will be looking to take some profits,” Koon Chow, a senior macro and foreign-exchange strategist at Union Bancaire Privee in London, said by e-mail.
The ruble declined 1.1 percent, while the rand rose 0.1 percent after it had approached 13 to the dollar for the first time in almost 14 years. Malaysia’s ringgit fell as the fastest inflation in a year fueled speculation interest rates will be raised.
The yuan fell 0.4 percent in U.S. hours. The International Monetary Fund pushed back until Sept. 30, 2016, the date that China’s yuan could be included in its basket of reserve currencies.
Nine out of 10 industry groups in the MSCI gauge slumped, with consumer and financial stocks leading declines.
In Turkey, the lira weakened 1 percent to 2.9254 per dollar. The central bank kept interest rates on hold Tuesday, failing to take steps to support the currency after the collapse of coalition talks.