Emerging equities fell to their lowest in 6-1/2 years yesterday as global markets continued to fret over China, while fresh yuan weakening pressured most emerging currencies.
The losses came despite a 2% bounce on mainland Chinese shares after a report that a selling ban on major institutional shareholders would remain in place until new rules on share disposals are published.
But Hong Kong-listed Chinese stocks fell almost 1%, after a private survey showed Chinese services sector activity expanded at its slowest rate in 17 months in December.
South Korean stocks fell 0.3% and the won slumped to its weakest in more than three months, hurt by North Korea’s reported testing of a hydrogen bomb.
That also pushed South Korea’s five-year credit default swaps four basis points higher from Tuesday’s close to 61 points, Markit said.
The benchmark emerging equity index dropped almost 1% to its lowest level since July 2009. Commodity-heavy South African and Russian stocks slipped 0.8% and 1% respectively.
Emerging currencies, which weakened sharply against the dollar last year, also face a depreciating yuan. China’s central bank set its daily guidance rate at its lowest in more than 4-1/2 years, triggering selling in offshore yuan, which slumped to its lowest since trading began in 2010.
“The market is taking it as a sign that China will allow more depreciation pressure on the currency, and that’s setting the tone across emerging markets,” said Thomas Harr, head of EM research at Danske Bank, predicting a 5-6% yuan depreciation versus the dollar this year.
In the one-year non-deliverable forwards market the yuan approached fresh seven-year lows weakening by over 1% at around 6.94 per dollar.
Other Asian currencies were pulled down in the yuan’s wake, with the Malaysian ringgit sliding over 1% to its weakest since November 19 whilst the Singapore dollar lost 0.6%, touching a three-month low.
“The impact is spreading,” Harr said. “If China depreciates faster, that will spread, and markets also feel the Chinese government is getting more worried about the economy.”
The most vulnerable emerging markets are those with a trade relationship with China, and commodity exporters, he added.
Oil slid more than 3% to new 11-year lows as the rift between Saudi Arabia and Iran snuffed out speculation that Opec members might agree output cuts to lift prices.
The Saudi stock index fell 1.45%, with food firm Savola extending Tuesday’s 9% drop due to worries about its Iran business.
Other oil producers’ currencies also came under pressure again, with the Russian rouble and the Kazakh tenge losing around 0.8% against the dollar.
The South African rand slipped 0.6% to its weakest in 3-1/2 weeks against the dollar after a survey showed private sector activity shrank faster in December. The Turkish lira also slumped 0.6% to its weakest in three months.
The Polish zloty fell 0.5% to a three-week low against the euro on growing concerns over the new government’s policies.
The Hungarian forint also slipped 0.5% against the euro despite decent 2015 growth figures unveiled by the economy minister.