“Emerging-Market Stocks Face Weekly Decline as Risk Appetite Fades”

Introduction

Emerging-market stocks are facing their first consecutive weekly losses since May. This downturn is driven by a technology sell-off and persistent concerns about the Chinese economy, causing investors to steer clear of risky assets.

Market Movements and Economic Concerns

Developing-nation stocks are poised for a decline, primarily due to a tech sell-off and ongoing worries about China's economic stability. MSCI’s EM stock index dipped 0.1% on Friday, marking consistent declines over the past two weeks. A significant factor was Taiwan Semiconductor Manufacturing Co., which pushed the technology sub-index to a 4% loss for the week. The emerging-market forex (EMFX) gauge also fell by 0.1% on Friday.

Despite US data showing mild inflation growth and steady consumer spending in June, emerging stocks and currencies remained largely unaffected. Traders are holding onto expectations that the Federal Reserve will cut rates in September. Juan Perez, director of trading at Monex USA, noted increased nervousness around emerging markets due to China’s struggles, juxtaposed with the US’s consistent growth.

Perez mentioned that traders have been recalibrating bets, considering potential market implications if US Vice-President Kamala Harris wins the upcoming elections. Additionally, weak global earnings and concerns about China’s economy have dampened market sentiment, with Asian currencies like the Taiwan dollar notably affected.

Latin American currencies, however, found some relief on Friday as a rally in the Japanese yen steadied. The yen, a significant funding currency for carry trades involving Latin American forex, helped provide this relief.

Equity and Bond Market Pressures

Citigroup Inc. strategists Luis Costa and Philip Yin highlighted that the impact of further global stock pressure on emerging markets will vary. Currencies such as the won, Chilean peso, and rupiah are historically more sensitive to equity portfolio flows, while high-yielding currencies like Brazil’s real, Mexico’s peso, forint, and rand respond more to bond funds.

For Asia’s low-yielding currencies, like KRW and TWD, which are significantly exposed to tech and semiconductor-related equity flows, equity pressure may be more pronounced. Higher US yields have increased demand for outbound investments, offsetting the effects of equity inflows and making these currencies sensitive to both US rates and tech equity performance.

In the bond market, China’s benchmark government bond yield fell to a record low, challenging policymakers to stem the decline. The central bank considers excessively low yields a threat to financial stability and the yuan's value. A Bloomberg survey indicated 2.25% as a critical threshold for the PBOC concerning the 10-year note.

Conclusion

Emerging-market stocks are under pressure due to a combination of tech sell-offs, concerns about China’s economic health, and fluctuating global equity and bond markets. As traders navigate these uncertainties, the outlook remains cautious with a focus on potential shifts in US monetary policy and its global implications.

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