Russia, Middle East lead declines as oil sell-off clobbers EM

Brent crude oil futures hit 3-month low

LONDON, July 17, (RTRS): Russian and Middle Eastern markets bore the brunt of a sell-off in emerging equities on Tuesday after oil prices tumbled over 4 percent the day before, while oil producers’ currencies also suffered.

Brent crude oil futures extended Monday’s losses in early trade, touching a new three-month low of $71.35 a barrel, as Libyan ports reopened and traders eyed potential supply increases by Russia and other producers.

“Further to the concerns over Libyan production coming back on stream is talk that the US may push oil from the Strategic Petroleum Reserve on to the market to send prices lower,” Dominick Chirichella, an analyst at the Energy Management Institute, said in a note.

MSCI’s benchmark emerging equities index was down 0.3 percent for a second day as energy stocks took a pounding and soft Chinese data continued to dog sentiment.

Moscow shares fell 1.7 percent to a two-week low, while Russian dollardenominated stocks tumbled almost 2 percent. Middle Eastern markets also rowed back, with Abu Dhabi down 0.7 percent and Saudi Arabia down around 0.2 percent.

Russia’s rouble dipped 0.3 percent against the dollar, as did neighbouring oil producer Kazakhstan’s tenge .

The sell-off in oil benefited big energy importers such as India, with the rupee gaining 0.3 percent and Indian stocks up 0.5 percent.

Concerns over China’s secondquarter economic growth continued to weigh on sentiment. Factory output growth weakened to a two-year low in a worrying sign for investment and exporters amid a trade war with the US.

Muddying the picture, new home prices enjoyed their fastest growth in almost two years in June, presenting a challenge for Chinese policymakers seeking to contain risks in a relatively strong part of the economy.

China said it was still confident of hitting its economic growth target of around 6.5 percent this year.

However, Hong Kong stocks fell 1.3 percent while Chinese mainland shares slid 0.6 percent, with the energy sector down 2 percent.

Indonesia fell 0.7 percent and Hungary 0.5 percent.

Away from the oil producers, currencies were mainly a touch stronger. China’s yuan refrained from testing 6.7 per dollar even though the central bank lowered the official fixing to the weakest since Aug 9 last year.

The South African rand hovered near Monday’s one-month high. The Turkish lira gained 0.2 percent after strong year-on-year growth in industrial output. But Pakistan’s rupee weakened another 1.9 percent after dropping on Monday in what appeared to be a fourth devaluation by the central bank since early December .

William Jackson, senior emerging market economist at Capital Economics, said investors were also awaiting the first US congressional testimony by Federal Reserve Chairman Jerome Powell later in the day.

“People will be looking for any commentary on the impact of trade tensions on the US economy and whether that’s already weighing on investment, and on the flattening of the yield curve and what that means,” he said.

Meanwhile, sterling edged higher on Tuesday, lifted by broad dollar weakness, though gains were capped by data on slowing British pay growth and overnight Brexit headlines.

With overall sterling bets leaning towards a net short compared with a large long position in April, traders grew wary of selling sterling aggressively at current levels.

“Sterling moves have been quite muted despite the overnight negative headlines, and that may be because overall net positions in the market are quite small,” said John Marley, an independent foreign exchange strategist.

The British pound rose 0.1 percent to $1.3251 as the dollar weakened against the euro and the Swiss franc.

Sterling hit a post-Brexit referendum high of $1.4377 in mid-April but tanked more than 9 percent since then to an eight-month low of 1.3078 in late June. It has recovered somewhat but remains well below 2018 highs.

However, pressure came in the form of data showing that British workers’ average weekly earnings rose by 2.5 percent on the year in the three months to May, slowing from the 2.6 percent growth in the previous three-month period.

Overnight Brexit headlines also kept a lid on gains. A series of votes in parliament exposed the growing rift within Prime Minister Theresa May’s Conservative Party over a Brexit roadmap.

By accepting demands of hardline Brexit campaigners, she exposed her vulnerability in parliament, where both wings of her party attacked each other, highlighting deep divisions that have hampered progress in talks with the European Union.

With less than nine months until the UK leaves the EU and a deal determining what happens to its future relationship needing to be signed well before that, the latest vote in parliament is seen by markets as a fresh headwind for sterling.

“We believe the risk of Parliament rejecting any deal put in front of them late in 2018, or early in 2019, is increasing, and this puts both the agreement on future relationships and the transition period after the end of March 2019 in serious jeopardy,” UBS strategist John Wraith said in a note.

Sterling has struggled to capitalise in recent weeks on signs that the economy is improving and upbeat comments from Bank of England policymakers because of mounting uncertainty over whether Britain can secure a trade deal with the EU before March.

Market expectations have shifted in favour of an interest rate increase next month, with implied probability nearing 80 percent compared with less than 50 percent in early June. HSBC became the latest bank to change its call, arguing for an August increase.

“It is a negative development for sure and that can be reflected in where the pound is trading currently or the latest data would have pushed sterling comfortably higher than these levels,” said Lee Hardman, an FX strategist at MUFG in London.