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[HONG KONG] An index of Asian shares outside Japan fell close to this year's lows thanks to a deepening selloff in commodities and concerns over slowing growth in China, while the dollar held its ground against a basket of currencies.
China's factory activity shrank more than initially estimated in July, contracting by the most in two years as new orders fell, according to a private survey that dashed hopes that the economy may be steadying. "We believe the stock market panic in early July chilled economic activity, which is what the manufacturing PMIs picked up," ING economist Tim Condon said in a research note ahead of the Caixin PMI release.
MSCI's broadest index of Asia-Pacific shares outside Japan fell more than 1 percent before paring losses to be down 0.9 per cent. The biggest losers were financials and cyclicals. The index's low for this year was on July 8.
Stock markets across the region declined with Japan's Nikkei down 0.5 per cent and South Korea's Kospi falling 0.9 per cent. "We believe the macro environment remains challenging for emerging market assets amid headwinds of low commodity prices, concerns over China and a looming Fed tightening cycle,"Barclays strategists wrote in a daily note in clients.
Recent flows data confirm that trend. Net foreign selling from emerging Asia has reached nearly US$10 billion over the past two months with only India seeing some tiny inflows.
Although outflows have pummelled stock markets from Korea to Taiwan, valuations suggest more downside is likely.
While recent weakness in stocks has made emerging market valuations more attractive than those of developed market counterparts, they are twice as expensive as Asian financial crisis lows, according to research from Julius Baer.
On Wall Street on Friday, the Dow lost 0.3 per cent and the S&P 500 shed 0.2 per cent, due to a drop in energy shares.
In currencies, the dollar on Monday held broadly steady at 123.97 yen. The euro was steady at US$1.1097.
While recent dollar moves have been buffeted by US economic data, the broader trend was on the upside after the Federal Reserve last week left the door open for a possible interest rate increase in September.
The U.S. dollar has rallied 7.75 per cent so far this year against the world's main trading currencies, after a 12.8 per cent rise last year.
And "the dollar's recent rally may just be getting started," according to research from the BlackRock Investment Institute. "Since the 1970s when the Bretton Woods fixed-currency regime ended and currencies began floating, a typical dollar rally has lasted roughly six to seven years," according to Russ Koesterich, BlackRock global investment strategist, who noted dollar rallies tend to be self-reinforcing, leading to greater inflows into U.S. assets in expectation of further dollar appreciation.
That traditionally is also a headwind for emerging markets, which have an inverse relationship to the dollar.
Commodities too are singing the emerging market blues.
Crude oil continued to flounder after posting its biggest monthly drop since 2008 in July on China's stock market slump and signs that top Middle East producers were pumping out crude at record levels.
US crude was down 0.7 per cent at US$46.81 a barrel after losing 21 per cent in July.
Copper prices fell 10 per cent in July, the worst month since January and are now at their lowest levels since June 2009.
Overall the Reuters commodity index fell 10.8 per cent in July, its biggest monthly fall since September 2011.
Reflecting the economic slowdown in China and sluggish growth in Europe and the Americas, international trade is also slowing.
Bonds were the sole bright spot.
The benchmark 10-year note yield held firm at 2.21 per cent while 10-year Japanese bond yields stabilized at 0.41 per cent.