Emerging markets lost more ground on Friday, with stocks set for their biggest weekly loss in just over a year and central banks from Korea to Russia wading into stem currency falls against a resurgent dollar.
The MSCI index for emerging market stocks fell a further 0.5 per cent after the previous session’s 4 per cent drop, the biggest daily loss since September 2011 as the U.S. Federal Reserve outlined plans to wind down its $85 billion-a-month asset-buying programme and Chinese data confirmed a sharp slowdown in the world’s second-biggest economy.
The index has fallen more than 5 per cent this week and year-to-date losses now amount to around 15 percent but faces more challenges as U.S. Treasury yields stay just off two-year highs.
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Outflows have already been severe, with EPFR Global data showing $2.7 billion have fled emerging debt funds in the past week, and $7 billion has leaked out since May 23. Emerging equity funds lost $3.5 billion in the past week, EPFR said.
On emerging bonds, yields on sovereign dollar debt were stable after a 30 basis points (bps) widening last Thursday, while domestic currency debt yields are at their highest since January 2012 on JP Morgan’s benchmark indexes.
Chinese stocks fell 0.5 percent to levels last seen in December 2012 as a money market squeeze that has taken overnight rates to multi-year highs abated only slightly on Friday. Authorities have steered clear of supplying much cash to banks, indicating they have no plans to loosen policy.
“Markets are reacting not so much to Fed tapering as to China tapering,” said Lars Christensen, chief emerging markets analyst at Danske Bank in Copenhagen. “What we are seeing in China is a combination of tight monetary policy and weak numbers.” “As it looks now it looks as if it will get worse for emerging markets before it gets better,” he added.
