Weaker oil, stronger dollar weigh on emerging markets

Emerging market shares headed for two-week lows on Monday and currencies started their first full trading week of the year on a sour note, facing the familiar headwinds of a stronger dollar and falling oil prices.

Emerging market stocks lost 0.7 percent, with Saudi and Nigerian oil companies’ shares suffering again as crude sank to just above $55 a barrel.

The euro hitting a 9-year low gave the dollar extra support as investors bet a growing risk of euro zone deflation and fears over Greece’s future in the bloc will force the European Central Bank to unleash quantitative easing.

“A weak euro can be good or bad for emerging markets and Greece is causing the bad kind of weakness as it revives fears of a crisis (while) anticipation of ECB QE is a good kind of euro weakness, which should allow risky assets to do well,” Societe Generale’s head of emerging markets strategy, Benoit Anne, said.

“At present we have a mix of the two and that creates uncertainty so the backdrop for risky assets is not great.”

Chinese shares were the exception, surging to their highest close for five years after reports that mortgage restrictions had been loosened to help support the real estate sector.

Meanwhile, the slide in oil prices saw dollar-denominated Russian shares clock up some of the sharpest losses, dropping nearly 6 percent before clawing back roughly half of the falls as a rise in the rouble ran out of steam.

Fellow oil exporter Nigeria saw the naira open 1.9 percent down on its 2014 close – a fall matched by Lagos’s main share index as Saudi stocks also took another 1.7 percent tumble.

In Hungary, the benchmark share index traded 1.04 percent lower and the forint weakened 0.25 percent against the euro after data showed the Purchasing Manager Index (PMI) fell to 50.7 in December from 55.0 in November.

In Turkey, the lira firmed 0.28 percent and the share index gained 0.86 percent after data showed a December drop in consumer prices pushed inflation to lower-than-expected levels in 2014.

President Tayyip Erdogan has repeatedly called for lower interest rates to support flagging growth, but the central bank has said it will keep policy tight until there is a clear improvement in the inflation outlook.

Reuters