July 26 (Bloomberg) — Developing-nation stocks are headed for their first back-to-back weekly losses since May, as a recent technology rout and lingering concerns around the Chinese economy led investors to pull out of risky assets.
MSCI’s EM stock index fell 0.1% on Friday and has recorded declines almost every day of the past two weeks. Taiwan Semiconductor Manufacturing Co. was a major contributor to the retreat, pushing the technology sub-index to a 4% loss for the week. A gauge for EMFX declined about 0.1% on Friday.
Both emerging stocks and currencies had a muted reaction to US data showing that inflation rose at a mild pace in June and consumer spending remained healthy. Traders held on to bets that the Federal Reserve will lower rates in September.
“Quite an eventful week as nervousness around EM has increased with a struggling China, while the US continues to show that it cannot be matched in consistent growth at the moment,” said Juan Perez, director of trading at Monex USA.
According to Perez, it’s been a week mostly characterized by recalibrating bets, as traders ponder what US Vice-President Kamala Harris potentially winning the elections could mean for markets.
Lackluster global earnings and jitters around China’s economy also dampened sentiment this week. Asian currencies, including the Taiwan dollar, have been particularly affected by
the equity downturn.
Meanwhile, Latin American currencies saw some relief on Friday after a rally in the Japanese yen steadied. The yen is a major funding currency for carry trades involving Latin American FX.
Equity Pressure
Citigroup Inc. strategists Luis Costa and Philip Yin said the impact of further global stock pressure on emerging markets will vary. Historically, currencies such as the won, Chilean peso, and rupiah are more sensitive to equity portfolio flows, while high-yielding currencies like Brazil’s real, Mexico’s peso, forint, and rand respond more to bond funds.
“For Asia’s low-yielding currencies like KRW and TWD, which have significant exposure to tech and semiconductor-related equity flows, the pressure from equities may be more
pronounced,” they said. “Higher US yields have increased demand for outbound investments, partially offsetting the effects of equity inflows and making these currencies sensitive to both US rates and tech equity performance.”
In bonds, China’s benchmark government bond yield fell to a record low, testing policymakers’ resolve to stem the move. The central bank sees excessively low yields as endangering financial stability and weighing on the yuan. A Bloomberg survey had suggested 2.25% was a red line for the PBOC for the benchmark 10-year note.
