There was no Happy New Year for emerging markets on Wednesday.
EM stocks and currencies started the first day of trading of 2019 on the back foot, with both asset classes knocked back by fresh signs of a slowdown in China and investors’ ongoing pivot away from riskier assets.
The benchmark MSCI EM stock index fell as much as 1.8 per cent after a closely watched gauge of Chinese manufacturing recorded its weakest reading since May 2017 — news that further fanned concerns that the country’s trade war with the US is hurting the economy. Within this, the Hang Seng closed down 2.8 per cent, its biggest single-session fall since October. On the mainland, the CSI 300 slipped 1.4 per cent. Chinese stocks account for just under 31 per cent of the index’s weighting.
Most EM currencies also weakened against the dollar. The Turkish lira led the declines with a drop of as much as 2.2 per cent after new data showed that manufacturing activity in the country contracted for the ninth straight month in December. It was followed by the Hungarian forint, Czech koruna and the Polish zloty all of which slid more than 1 per cent.
The Brazilian real was the main outlier, notching a 1.2 per cent gain against the greenback, as optimism over newly sworn in president Jair Bolsonaro’s reform plans offset concerns about China’s economy. The gains helped limit the loss on the wider JPMorgan Emerging Market Currency Index to just 0.5 per cent.
Brazilian equities also managed to buck the broader sell-off in global stocks, with the country’s Bovespa index pushing 2.7 per cent higher at the open.
A confluence of factors — including rising US interest rates, a stronger dollar, and heightened global trade tensions — contributed to a sharp sell-off that pushed the MSCI EM equity index into a bear market in October.
While the index has since recovered slightly, it remains down 16 per cent from its January peak.
“EMs were doubly hit in mid-2018 by the US-China trade war,” said Charles Dumas, chief economist at TS Lombard. “The sharp dollar rise pushed up the cost of imports, while the yuan slump made exports less remunerative — for non-oil economies that have been in large deficits for 12 years.”
Get alerts on Emerging markets when a new story is published