Emerging-market stocks decline as China clouds future beyond Fed

What does the worrying news coming out of China mean for you and your clients?

Bloomberg News

Emerging-market stocks fell to a five-week low as the growing risk of deflation in China raised doubts the global economy can withstand an increase in U.S. borrowing costs.

Hong Kong-traded Chinese shares dropped the most since September. Egyptian equities headed for their biggest three-day decline in 17 months as concern about the country’s security situation increased pressure on policy makers to devalue the pound. Dubai stocks retreated to the lowest this year and Qatar’s benchmark index posted for the longest slump in 12 years. Brazil stocks slid for a third day. Russia’s ruble and Indonesia’s rupiah strengthened against the dollar.

The likelihood the Federal Reserve will increase interest rates on Dec. 16 has surged to two-thirds from one-third two weeks ago, signals from the futures market suggest. Concern that higher lending rates in the U.S. will spur investors to dump emerging-market assets fueled a $6 trillion meltdown in developing-nation stocks this year before expectations for a delay caused a rebound. As more investors reconcile to Fed action next month, their focus is turning to China’s economic health.

“One of the major headwinds facing emerging economies at this stage of the cycle is the collapse in demand,” Joseph Dayan, head of markets at BCS Financial Group in London, said by e-mail. “You have an imminent rate hike in the U.S. that is driving up the dollar, which is not supportive for emerging- market growth. At the same time, there is no obvious signs in pick-up of Chinese demand.”

The MSCI Emerging Markets Index fell 1.4 percent to 831.95 at 8:52 a.m. in New York, its fourth day of losses. Data showed China’s consumer inflation waned in October while factory-gate deflation extended a record streak of negative readings. Federal Reserve Bank of Boston President Eric Rosengren said encouraging U.S. data makes it appropriate for the Fed to consider raising rates as soon as next month.

The Hang Seng China Enterprises Index slid 1.8 percent. China’s consumer-price index rose 1.3 percent in October, official data showed, compared with the 1.5 percent median estimate in a Bloomberg survey. The producer-price index fell 5.9 percent, extending its streak of negative readings to 44 months. The weak data may open the door for more stimulus as inflation remains about half the government’s target pace.

“The risk of deflation has accentuated,” Liu Li-Gang, the chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong, said after the China report. “This requires the People’s Bank of China to engage in more aggressive policy easing.”

Tourism Crisis

Egyptian stocks fell the most in the world as the benchmark EGX 30 Index lost 4.4 percent and the nation’s dollar-bonds fell. The country’s tourism industry is in a crisis after a Metrojet plane was downed over the Sinai peninsula, stirring concern the security situation is worsening. That, coupled with increases in borrowing costs by state-run banks, pushed traders to wager that policy rates will be increased.

Investors are being driven away by “the security situation, given tourism is a key sector, and the fact that the big two countries for tourists, Russia and the U.K., are pulling people out,” Tim Ash, head of EMEA credit strategy at Nomura International Plc in London, said by e-mail. “Investors would prefer just to see focus on improving the security situation to make it save for tourists to return.”

Dubai’s main stocks gauge fell 2.4 percent and Qatar’s equity benchmark lost 2 percent. A gauge of 200 Persian Gulf shares including names like Saudi Basic Industries Corp., Emirates Telecommunications Corp. and Qatar National Bank headed for the lowest level since Aug. 24.

Brazil’s Ibovespa gauge headed for its longest decline in almost three weeks as the China data dimmed the outlook for raw- materials exporters.

The ruble strengthened 0.1 percent against the dollar amid speculation exporters preparing to pay 425 billion rubles ($6.6 billion) of November taxes are converting foreign-exchange revenues into the domestic currency. Sberbank CIB said the gains may be short-lived. The rupiah climbed 0.3 percent.

India’s rupee gained 0.2 percent as Prime Minister Narendra Modi eased restrictions on foreign direct investments in 15 industries.

The premium investors demand to own emerging-market bonds rather that U.S. Treasuries widened one basis point to 383, according to JPMorgan Chase & Co. indexes.