Disinflation spreads across several emerging markets and selloff deepens

A selloff in emerging markets accelerated Tuesday after data releases from China to Hungary underscored the price nations are paying for disinflation: a deeper slowdown in economic growth than initially expected.

The MSCI Emerging Market Index of stocks headed for the lowest close in almost four weeks and looked to breach the support level at its 50-day moving average. Its currency-index counterpart also traded at the weakest level since July 10, with the South Korean won and Malaysian ringgit among the worst performers. Sovereign risk premiums widened as US Treasury yields fell.

Much of the bullish case for emerging markets this year was predicated on a growth recovery led by China, which successive data releases have shown to be patchy at best and a non-starter at worst. Data released Tuesday showed exports in July tumbled almost 15% for the quickest contraction in a year, reflecting a slump in global demand. At the same time, imports sank at more than double the pace economists forecast, showing weakness in domestic consumer demand. The country is already battling deflation, the extent of which will be revealed in a report on Wednesday.

Sobering China Trade Numbers Have Implications Going Beyond Yuan

Chinese stocks listed in Hong Kong dropped, with both the technology index and broader enterprises index falling more than 2.2% each. That sent the emerging-market gauge lower for the fifth time in six days and closer to falling below the psychological 1,000 threshold. 

In Hungary, which has the highest interest rate in the European Union, inflation dipped below 20% for the first time in 11 months. The government expects the rate to fall below 10% by October. 

While that sounds like good news — and indeed the forint was the only emerging-market currency to gain against the dollar on Tuesday — the subtext is less reassuring. Hungarian consumer prices rose faster than expected on a month-on-month basis and the country is in recession, with three quarterly contractions already reported.

Dollar Gains on Concern China Relaxing Grip on Yuan

With the macro shifting from worries over inflation to concern over the delayed impact of hawkish policies, idiosyncratic stories dictated some local market moves.

Turkey’s policymakers will raise interest rates only in modest increments and pause at a benchmark rate of 20%, well below the central bank’s year-end inflation forecast of 58%, Bank of America Corp. said. The lira posted modest losses.

In Gabon, dollar bonds fell. The western African nation on Monday had to increase the yield it offered on a $500 million blue bond to garner enough investor interest. That sale was part of a so-called debt-for-nature swap that will be used to finance a buyback of its existing dollar-denominated bonds and help support marine conservation in the country.

As the day progresses, investors will parse Chile’s inflation data, Mexico’s foreign reserves and minutes of the latest central-bank meeting in Brazil for further insights into how the balancing act between consumer prices and economic recovery is playing out in emerging markets.