Emerging Assets Slump on China Selloff as Iran-Saudi Ties Sour

  • China halts trading in stocks after CSI 300 drops 7%
  • Developing-nation currency gauge falls to record low

China Stock Selloff Tests New Market Circuit Breakers

Emerging-market assets sank as a bigger-than-forecast slump in Chinese manufacturing fueled concern that the nation’s economic slowdown will curb global growth and escalating tension between Saudi Arabia and Iran underscored geopolitical risks in the Middle East.

China halted stock, futures and options trading after a 7 percent slump in the CSI 300 Index caused the nation’s new circuit breakers to kick in. Equities in South Korea, India and South Africa slid at least 2.1 percent, while Saudi Arabian shares dropped 2.4 percent. Brazil’s stock benchmark fell for a fourth day. The offshore yuan weakened the most in five months. A gauge of 20 developing-nation exchange rates fell to a record low against the dollar.

Emerging-market stocks, which posted their biggest decline since 2011 last year, remain under pressure on concern a slowdown in the world’s second-biggest economy will spill over to the rest of the world. Data showed Chinese manufacturing shrank for a fifth month, the longest streak since 2009. Saudi Arabia and some of its Gulf allies severed or downgraded ties with Iran in the biggest meltdown in relations between the Middle Eastern powers in almost three decades, raising the specter of deepening conflicts across the region.

“The data on the industrial side of the economy has been pretty bleak for many months, and these numbers today just confirm that trend is continuing,” Nicholas Field, an emerging-market equity strategist who helps oversee about $22 billion in assets at Schroders Plc in London, said by phone. “It’s not changing people’s views.”

China Manufacturing

The China rout was worsened by the planned end of a ban on share sales by major stakeholders at the end of this week. Policy makers, who went to unprecedented lengths to prop up stock prices last year, are trying to prevent financial-market volatility from weighing on an economy set to grow at its weakest annual pace since 1990.

The Caixin China Manufacturing PMI index released Monday showed a drop to 48.2 last month from 48.6. The median estimate of 20 economists surveyed by Bloomberg was for a reading of 48.9.

China will “most definitely” be a key driver for emerging-market performance, in addition to the pace of the Federal Reserve tightening and commodity prices this year, said Michael Wang, a strategist at hedge fund Amiya Capital in London, who prefers Indian, Indonesian and Russian shares.

Brazil Slowdown

The MSCI Emerging Markets Index slumped 3.3 percent to 767.77. All 10 industry groups retreated. The benchmark, which has traded below its 50-day moving average since late November, tumbled 17 percent in 2015. Equities in developing nations sell for an average 10.6 times 12-month projected earnings, a 31 percent discount to stocks on the MSCI World Index.

The Ibovespa declined 2.8 percent in Sao Paulo, while Brazil’s real slumped 1.9 percent against the dollar as forecasts showed Latin America’s largest economy is heading to its deepest recession in more than a century.

The equity selloff in China came on the first day the circuit breakers took effect. Under the mechanism, a move of 5 percent in the CSI 300 triggers a 15-minute halt for stocks, options and index futures, while a move of 7 percent closes the market for the rest of the day. The CSI 300 of companies listed in Shanghai and Shenzhen fell 7.02 percent before trading was suspended. Hong Kong’s Hang Seng China Enterprises Index dropped 3.6 percent.

Saudi Stocks

Taiwan’s Taiex Index fell 2.7 percent, while South Korean and Malaysia shares declined at least 2 percent. Indian stocks sank 2.1 percent after an index showed a contraction in the nation’s manufacturing for the first time in more than two years. The Nikkei and Markit Economics Index fell to 49.1 in December, data showed Monday.

The Tadawul All Share Index retreated the most since Dec. 13. The Saudi government and Bahrain gave Iranian ambassadors 48 hours to leave after protesters burned the Saudi embassy in Tehran following the execution of Saudi cleric Nimr al-Nimr, a critic of the kingdom’s treatment of its Shiite minority. The United Arab Emirates reduced its diplomatic representation to the level of charge d’affaires.

Currencies

A gauge tracking 20 emerging-market currencies slid 0.9 percent to a record low. Malaysia’s ringgit and Indonesia’s rupiah fell the most in three weeks as an escalation of tension between Iran and Saudi Arabia bolstered demand for the dollar. 

Angola’s currency dropped 15 percent to 155.5555 per dollar. The nation’s central bank is trying to reduce the gap between the kwanza’s official rate and that on the black market, where the currency was fetching between 270 and 280 against the dollar last year.

The won weakened 1.3 percent after data showed South Korea’s exports dropped more than expected in a 12th monthly decline. The offshore yuan declined 0.9 percent. China’s central bank cut its reference rate for the currency by 0.15 percent to 6.5032 a dollar on Monday, the weakest since May 2011.

Bonds

The yield on China’s 10-year sovereign bonds due October 2025 rose three basis points to 2.89 percent, the highest since Dec. 21. Turkish 10-year debt fell, sending yields climbing 32 basis points to 11.06 percent.

The premium investors demand to own emerging-market bonds over U.S. Treasuries widened four basis points to 419. The spread increased 61 basis points in 2015, the most in four years.

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