EMERGING markets began the fourth quarter on a cautious note amid conflicting signals from China on its manufacturing revival.
Investors are also awaiting a data-packed week for clues on the outlook for growth and inflation.
MSCI’s benchmark for developing-nation stocks edged higher while the index for currencies drifted lower, signalling indecision among investors on whether the biggest quarterly sell-off in a year has made the assets cheap enough to resume buying. Sovereign-risk premiums widened amid higher US yields as the focus remained firmly on the higher-for-longer narrative for global interest rates.
China’s official purchasing managers’ index (PMI) over the weekend brought encouraging signs of investors looking for indications of a bottom in the country’s economic slump. The data showed a pick-up in activity, with manufacturing returning to expansion. However, a popular private measure of the same data – the Caixin PMI – came in below forecasts, suggesting the economic recovery is still shaky.
“This was supposed to be a quiet summer for emerging markets,” HSBC researchers including Murat Ulgen wrote in a note. “However, the market mood saw a marked deterioration given the sharp spike in core bond yields, the US in particular, as well as a stronger US dollar. Moreover, the underwhelming data out of mainland China didn’t help with the investor mood either.”
The data was followed by weak PMIs across Asia, sending currencies lower. The World Bank cut its forecast for growth in East Asia and the Pacific, citing tighter financing conditions and a weak global environment. It trimmed the projection for China’s expansion to 4.4 per cent next year, from the previous forecast of 4.8 per cent.
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Investors will assess whether the sluggishness seen in Asia is spreading to other emerging-market regions as South Africa, Saudi Arabia, Brazil and Mexico report their PMIs this week.
The key data release of the week would be the US nonfarm payrolls. There has been a resurgence in hiring over the past two months, adding to pressure on the Federal Reserve to keep rates higher for longer, but economists project a gentle slowing of the labour market to have resumed in September.
Meanwhile, a survey by HSBC showed that investors remain optimistic for gains in emerging markets despite three quarters of losses. The results revealed the net share of respondents with a bullish view on prospects over the next three months came in at 17 per cent, which was lower than the 22 per cent in the previous survey but still showed the positive bias towards emerging markets continuing. BLOOMBERG
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