Emerging market assets fall to 2024 lows amid growth and interest rate risk

(Bloomberg) - The Emerging Markets Equity Benchmark Index erased a 2024 promotion and a currency index hit a new low for the year on signs that global monetary easing will be delayed and China's economic recovery remains sluggish.

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Risk aversion has gripped assets in developing countries as money markets no longer expect the Federal Reserve to cut interest rates in September. Monday's U.S. retail sales data showed that the world's largest economy remains strong despite a 23-year high in borrowing costs. The dollar rebounded for a fifth straight day, adding pressure on local currencies.

Read more about Dollar plunges through Asian currencies, fueled by Renminbi

The dollar's decline accelerated after China released economic growth data on Tuesday. Although the Chinese government announced a faster-than-expected expansion of the economy in the first quarter, details suggested that the economic recovery may have stalled, with retail sales growth slipping in March and industrial output coming in lower than expected.

"Strong Chinese GDP may not have boosted market interest in Chinese equities, but it did exacerbate concerns that China's economic growth will fuel global inflation and make major central banks think twice about their rate-cutting plans," Ipek Ozkardeskaya, senior analyst at Credit Suisse, wrote in a report. But it does heighten concerns that China's economic growth will fuel global inflation and make major central banks think twice about their rate-cutting plans.

After the EU imposed a series of trade restrictions on China, the risk to China's economy has increased further. In addition to investigating China's subsidies for electric vehicles, the EU is also investigating whether the Chinese government has provided illegal support for wind power plants on the European continent. The EU has also investigated subsidies to solar energy and railway companies, and will soon launch an investigation into China's procurement of medical devices.

The rupee is a record.

The Renminbi fell to its lowest level since November after the People's Bank of China accidentally set a weaker daily kuni exchange rate, triggering a selloff across Asia. The rupiah was the worst performing currency in emerging markets, falling more than 2% against the US dollar.

The MSCI Emerging Markets Index fell 1.7%, its biggest drop since January 17th. The index is now down 1% for the year, and its counterpart fell 0.3% on Tuesday, bringing its 2024 loss to 1.8%. The Indian rupee fell to a record low, and the South African rand fell for a third day, its longest losing streak in four weeks.

"The People's Bank of China's move ahead of the Fed will put more pressure on the renminbi and encourage investment flows to the U.S.," wrote Christophe Boucher, chief investment officer at ABN AMRO Investment Solutions. China's economic growth data "show that growth is uneven. This calls for more action on the part of the central bank, a task that is now becoming more challenging because of the Fed's pivotal delay.

In the dollar-denominated bond market, Sri Lanka led the decline as the South Asian country failed in its first round of restructuring talks with investors. Investors also sold bonds from Pakistan, Angola, Nigeria and Egypt.

Geopolitical tensions in the Middle East also weighed on the market, with senior Israeli military officials saying Israel had no choice but to respond to a direct Iranian attack on its territory. On a closing basis, the resonance fell to its lowest level since January 17th.

In Hungary, the 10-year sovereign local bond yield rose to its highest since November, while the forint fell for a third consecutive day. The country's assets have been underperforming due to growing concerns about the budget deficit.

-Written with the help of Selcuk Gokoluk.

(For more on Dollar Bonds, Schechter and Hungary, click on Updates).

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