Emerging Stock Rally Evaporates as China Growth Concern Returns

  • Data showed Chinese home-price recovery slowed in October
  • Fed minutes stress potential of December rate increase

The biggest rally in emerging-market stocks in a month faded as Chinese housing-market data stoked concern that a slowdown in the world’s second-largest economy will damp global growth and Federal Reserve meeting minutes stressed the potential for a December increase in U.S. interest rates.

Shares in Shanghai dropped to a two-week low after President Xi Jinping indicated China faced downside economic risks and data showed a recovery in home prices slowed. The Colombian peso and Indian rupee declined as minutes from the Fed’s last policy meeting included language saying “it may well become appropriate” to raise the benchmark lending rate in December, a move that is expected to lure money away from riskier assets as the dollar strengthens.

Futures traders see a 66 percent chance of the Fed raising rates in December, more than double the odds predicted a month ago, data compiled by Bloomberg show. Morgan Stanley’s Market Implied Pace of Rate Hikes Index suggests the Fed will carry out three 0.25 percentage-point rate increases in the 12 months after its first move.

“China remains the focal point of investors’ concern, and the economic data we are seeing from China only adds to this general uncertainty,” Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, said by phone. “The big Fed-related concern is not so much the fact of a rate hike, but rather the pace and scope of the rate increase, and this uncertainty surrounding the first hike in years weighs on emerging-market sentiment.”

MXEF's One-Year Performance vs Bloomberg Commodity Index

The MSCI Emerging Markets Index closed little changed at 824.56 with 422 stocks lower and 342 higher. The gauge has slumped 14 percent this year and is valued at 11 times its 12-month estimated earnings, compared with a 1.1 percent decline in the MSCI World Index of developed countries, which trades at a multiple of 16.

Colombia’s peso weakened 0.8 percent and the rupee fell 0.4 percent. A Bloomberg gauge of 20 developing-nation currencies traded near a seven-week low for a third day.

The real gained 1.3 percent against the dollar and the Ibovespa equity benchmark rose 0.4 percent in Sao Paulo after Brazil’s Congress upheld presidential vetoes of legislation that would have increased fiscal expenditures.

Micex Rallies

Russian markets advanced amid speculation improved relations with the U.S. and Europe will lead to an easing of sanctions. President Vladimir Putin and his U.S. counterpart Barack Obama met at a Group of 20 summit to discuss ways to fight Islamic State after terrorist attacks in Paris last week. Putin also made concessions on a debt deal with the Ukraine this week.

The Micex Index rose 1.3 percent to the highest level since mid-February. The ruble strengthened 0.6 percent against the dollar as oil, Russia’s biggest export, gained in London. A rapprochement would warrant a reconsideration of the country’s junk rating if the U.S. and Europe ease sanctions that have contributed to its economic slump, Standard & Poor’s said Tuesday.

The Shanghai Composite Index declined 1 percent after Xi acknowledged downside risks to growth while assuring fellow leaders that Asia’s biggest economy is resilient and will remain on the path of reform. Home-price recovery slowed amid a supply glut, data showed on Wednesday.

The extra yield investors demand to own emerging-market debt over U.S. Treasuries narrowed four basis points to 383, according to JPMorgan Chase & Co. indexes.

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