Economic Woes in China
Emerging markets faced a downturn on Monday. The decline occurred amid low trading volumes due to the US Labor Day holiday. The MSCI emerging market equities index fell by 0.4%, primarily due to losses in Chinese stocks like Alibaba and Tencent. This drop occurred despite a rebound in shares of Taiwanese semiconductor giant TSMC.
The slide in emerging markets was fueled by concerning data from China. The country’s factory activity contracted for the fourth consecutive month in August. This trend raises worries that China’s economy, the world’s second-largest, may not meet its growth target for the year.
Emerging markets faced a downturn on Monday – Focus on US Monetary Policy
As traders assess the situation, attention is shifting to the US monetary policy. The countdown for potential US monetary easing is underway. Upcoming economic data will shape expectations regarding interest rate cuts and their impact on the dollar and riskier assets.
Traders are particularly interested in the US jobs data due later this week. This information will provide insights into the pace of potential rate cuts. Win Thin, the global head of markets strategy at Brown Brothers Harriman, commented, “US economic growth remains robust, driven by strong consumption, even as disinflation continues slowly but surely.” He added, “We believe the Fed will start cutting rates this month in a very gradual manner.”
Emerging markets faced a downturn – Currency Markets and Concerns
In the currency markets, the MSCI emerging FX gauge, which tracks total currency returns, dropped by around 0.2%. The Brazilian real saw a decline, even after the central bank auctioned currency swaps to curb losses. Brazil’s fiscal outlook has become a concern following President Luiz Inacio Lula da Silva’s announcement to increase cooking gas subsidies. Additionally, the Supreme Court’s decision to block access to TikTok has dampened market sentiment.
Marco Oviedo, a senior Latin America strategist, noted, “The central bank’s intervention was insufficient for the currency to perform well amidst fiscal concerns and overall pessimistic sentiment in Latin America.”
The Mexican peso also weakened as traders awaited news regarding the nation’s plan to reform the judiciary system. A new Congress will convene on Monday to debate these reforms.
Hungary’s Debt Issuance
In credit markets, Hungary is making headlines by offering yen-denominated bonds for the first time since 2022. This decision brings the government closer to its limit on foreign exchange-denominated debt. The issuance reflects Hungary’s strategy to diversify its funding sources while navigating economic challenges.
Overall, emerging markets face pressures from both domestic challenges in China and global monetary policy shifts. Investors will need to stay vigilant as they monitor these developments and their impact on market dynamics.
