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Rough quarter for EM currencies, stocks even as China steadies

The rand have remained resilient as oil and metal prices soared.
The rand have remained resilient as oil and metal prices soared.
Image: 123RF/Ufuk Zivana

Emerging market currencies and stocks on Thursday were set for their worst quarterly performances since the pandemic-driven crash in early 2020 as investors feared about sky-high inflation and a potential recession caused by tighter monetary policies.

A stronger dollar has spurred capital flows out of risky emerging market assets this quarter, piling pressure on the economies struggling from the impact of soaring inflation, the Ukraine conflict and supply chain snarls.

The MSCI's EM currencies index dipped as the dollar firmed, on pace for its worst quarter since March 2020 with a 4.4% decline.

“With inflation high in the US and EU, and still higher in the EM space, I expect EM currencies to depreciate at least in nominal terms,” said Per Hammarlund, chief EM strategist at SEB.

“It would have to be a carry story in that case ... Brazil, Mexico, Chile to some extent could be interesting but I don't see any big EM currency really strengthening.”

Currencies of countries that import commodities such as the Turkish lira and Indian rupee have suffered during the quarter, while those of exporters including the Brazilian real and the rand have remained resilient as oil and metal prices soared.

The lira slipped on Thursday as data showed Turkey's foreign trade deficit surged 155.2% year-on-year to $10.61bln in May, with a 43.5% rise in imports.

Hungary's forint weakened against the euro as a rally from record lows this week after the central bank's big rate hike proved short-lived. Forint has been central and eastern Europe's worst-performing currency this year on concerns about high budget deficit and soaring energy costs among others.

The benchmark Budapest SE stocks index has shed almost 11% so far in the quarter, among the worst-performing bourses.

The MSCI's index of emerging market equities slid 1%, on course to mark quarterly losses of about 12%.

Chinese equities stood out, with Shanghai's benchmark index closing up 1.1% after data showed factory and service sectors snapped three months of activity decline in June as authorities lifted a strict Covid-19 lockdown in Shanghai, reviving output and consumer spending.

The index has climbed almost 19% since hitting a trough in April, although the economic outlook for the world's second-largest economy remains subdued amid worries of a global economic slowdown.

Ratings agency S&P slashed its growth forecast for the second time in two months on Wednesday.

“The rebound in Chinese stock prices is probably a mean-reversion to pre-lockdown levels, rather than a sustainable rally,” analysts at BCA Research wrote in a note. “This cautious view on Chinese equities is also corroborated by falling raw industrial prices, which reflect weak Chinese growth.”

Meanwhile, sovereign dollar bonds issued by Sri Lanka slipped after the International Monetary Fund said the country was on track for a programme though discussions would continue.

The statement boosted hopes that the crisis-hit country can put its public finances in order and reassure creditors.

Reuters

 

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