Emerging equities slip after losses in Asian markets

EMERGING equities fell yesterday after two days of strong gains as markets looked to a US Federal Reserve meeting and potential policy tightening in China, though a rise in the oil price to mid-2015 highs underpinned energy producers.

MSCI’s benchmark emerging stocks index slipped 0.5 percent, led lower by some big losses in Asian markets, which then spread to European trading.

Chinese mainland stocks fell 1.3 percent and Hong Kong shares 0.6 percent, with index heavyweight Tencent down over 3 percent, after bank lending in China hit a record last month.

Although that may act as a short-term spur to economic activity, markets are wary it will encourage further monetary and regulatory action from the Chinese authorities.

“The big question is what happens in China,” said Jakob Christensen, head of emerging markets research at Danske Bank, adding that the economy could lose momentum in the coming months.

“The broad money supply… still points to a fairly tight situation, and financial tightening will have an impact on the economy.”

China is likely to set its 2018 economic growth target at around 6.5 percent, unchanged from 2017, as a government deleveraging campaign is set to intensify, a policy adviser was quoted as saying.

Christensen said markets were also in a wait-and-see mode ahead of the Fed meeting which started yesterday and tomorrow’s European Central Bank meeting.

“The (rate) hike by the Fed is priced in and shouldn’t be a surprise, but the more interesting thing will be the signals about 2018,” he said. “The Fed has to tread cautiously until wage inflation is on a strong upwards trend.”

He added that some analysts were expecting four US rate hikes next year, while the market was priced for about two.

The average yield spread of emerging market sovereign bonds over US Treasuries on the JPMorgan EMBI Global Diversified index has flatlined at 288 basis points, after narrowing from a high of 302bps in mid-November.

In Europe, Turkish banks tumbled 1.3 percent and the Turkish index fell 0.7 percent.