Emerging market assets at lowest point so far in 2024

The benchmark index for emerging-market equities erased its 2024 advance and the gauge for currencies posted a new low for the year amid signals that global monetary easing will be delayed and China’s economic recovery remains weak.

A risk-off sentiment gripped developing-nation assets, taking a cue from money markets that were no longer pricing in a Federal Reserve interest-rate cut in September, pushing their expectation to November. The reversal followed US retail sales data on Monday that showed the world’s biggest economy remains robust despite borrowing costs at a 23-year high. The dollar’s fifth-day rally added pressure on local currencies.

The sell-off accelerated after China reported its economic growth figures Tuesday. While Beijing posted faster-than-expected expansion for the first quarter, the details showed the recovery may be already fizzling out. Growth in retail sales slumped in March and industrial output fell short of forecasts. 

“A strong Chinese GDP may have not boosted appetite for Chinese stocks, but it sure boosts worries that rising Chinese growth will fuel global inflation and make major central banks think twice about their rate cutting plans,” Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, wrote in a note. 

The risks for China’s economy increased further after the European Union unleashed a barrage of trade restrictions against the country. In addition to an investigation into Chinese subsidies for electric vehicles, the bloc is looking into whether Beijing provided illegal support for wind parks on the continent. It has also brought subsidy probes into solar and railway firms and will shortly launch an inquiry into China’s procurement of medical devices.

RUPEE RECORD

The yuan fell to the lowest level since November and sparked a sell-off across Asia after the People’s Bank of China unexpectedly set a weaker daily reference rate for the managed currency. The Indonesian rupiah was the worst performer among EM peers, losing more than 2% against the dollar.

The MSCI Emerging Markets Index fell 1.7%, its biggest drop since Jan. 17. It now trades 1% lower for the year. Its currency counterpart lost 0.3% on Tuesday, taking its 2024 decline to 1.8%. The Indian rupee fell to a record low, while South Africa’s rand fell for a third day, its longest losing streak in four weeks.

“The PBoC moving before the Fed will put more pressure on the yuan, and will encourage outflows of investments to the US,” Christophe Boucher, chief investment officer at ABN Amro Investment Solutions, wrote. China’s growth data “shows unbalanced growth. This calls for more action from the central bank’s side, but the mission is now becoming quite challenging given the Fed’s pivot being delayed.”