LONDON: A four-day rally in emerging equities stalled on Thursday after data showing a clear slowdown in manufacturing activity worldwide highlighted risks to growth in the developing world.
The MSCI benchmark equity index touched a 3-1/2 week high early in the session but fell into negative territory to trade just under flat by 0945 GMT after purchasing managers’ indexes (PMI) showed factory orders in emerging economies mostly contracted last month due to weak US and euro zone economies.
China’s PMI expanded a touch in August to a below-forecast 50.9 while readings in export powerhouses Korea and Taiwan were under the 50 level that denotes expansion. In emerging Europe manufacturing decelerated or was stagnant.
"Looking at the PMIs it seems that export indicators and new orders are on the weak side in many countries and that will add to worries about the extension of the soft patch in the global economy," said Mats Olausson, head of emerging markets research at SEB in Stockholm.
"Markets are in for a volatile autumn and that will be driven by uncertainty on the business cycle as well as political nerves in the euro zone and mixed messages on the near term fiscal stimulus in the United States," Olausson added.
While hopes of extra stimulus steps from the US Federal Reserve have helped revive risk appetite to a degree, this has been tempered by signs that inflation remains a priority for China. Shanghai shares fell 0.4 percent after China’s premier said inflation was Beijing’s top task.
In central Europe, Polish stocks were the worst hit with losses of over 2.5 percent. Shares in Europe’s No. 2 copper producer KGHM were feeling the heat from copper’s 1.4 percent price slump after PMI data showed a fall in Chinese export orders.
"It looks like a retreat after PMI data around Europe that was disappointing. We’ve had a few good sessions and now the data has encouraged some to sell," said Wojciech Wosko, a broker at the Bank Zachodni WBK in Warsaw.
Wosko said KGHM was the biggest contributor to the fall while banks PKO and Pekao were also selling off due to their vulnerability to euro zone worries.
Other central European bourses also lost over one percent while Moscow shares fell almost 2 percent due to losses on oil and metals markets.
Rate cuts
Fear about the global economic outlook was also behind Brazil’s decision on Wednesday to cut interest rates by 50 basis points, a move that will increase rate cut bets in other emerging markets especially in Latin America.
"Beyond Brazil, this sends a powerful message to other central banks in EM, given Brazil’s status as a flagship EM country. We are indeed going to see stronger expectations of other central banks following suit, which will help push local rates lower," Societe Generale said in a note, naming Israel, South Africa and Mexico as countries that may ease policy.
One market where swaps markets have gone from pricing rate hikes to cuts is South Africa where data on Thursday showed manufacturing stayed in contraction territory in August. Recent growth data has also disappointed.
That has boosted the front end of the bond curve, with the benchmark yield easing more to Thursday to a new record low of 6.45 percent though the rand was flat against the dollar. Bonds in central Europe rose too, with one-year Polish yields slumping 40 bps to a seven-month low
Central European currencies fell against the euro and the Swiss franc with the forint falling around 2 percent versus the latter. PMI surveys in the three big emerging European economies reinforced the picture of slower growth and exports
The exception was the Serbian dinar which rallied 0.8 percent a near 2-1/2 month high versus the euro. The currency was continuing to benefit from news that the International Monetary Fund (IMF) had approved a one billion euro standby loan to the country.
The Turkish lira also extended gains rising to almost a one-month high to the dollar but with locals out this week for Eid holidays, moves have happened in thin offshore trade.
