Emerging Markets Falter With China Concerns Weighing

(Bloomberg) -- Emerging-market assets are starting the new year on a weaker note, weighed down by concerns over China's economic stagnation.

MSCI Inc.'s benchmark for developing-nation stocks fell for the first time in seven days, while the currency index dropped for the first time in eight. Credit default swaps protecting against payment risks among 22 sovereign issuers widened for a third day, the longest streak since late November.

Chinese stocks made the worst start to a year since 2019 and the yuan slid the most since June as weak manufacturing and home-sales data signaled the growth deceleration in the world's second-biggest economy is far from over. President Xi Jinping's rare admission of the country's economic challenges further weighed on investor sentiment.

Read more: China's Xi Vows to Strengthen Economic Recovery After ‘Tough' Year

“The purchasing managers' index figures indicate a slowdown in China's economic recovery in the last months of the year,” Stephen Innes, managing partner at SPI Asset Management, wrote in a note. This will “pressure fiscal and monetary policymakers to take urgent action. China requires more than just stimulating economic activity — it necessitates fundamental reform of the underlying growth engine.”

The latest data releases showed China's factory activity shrank in December to the lowest level in six months and a slide in home sales accelerated. Most of Asia also saw a slowdown in new orders and production volumes in December, as lower demand from China hurt.

Read more: China's Patchy Recovery Keeps Asia's Factories in a Slump

Emerging markets had ended 2023 on a high note, fueled by a late recovery amid a weakening US dollar. The MSCI Emerging Markets Index of stocks rose 7% last year after being down almost down 5%. The currency gauge posted an annual gain of 4.8%, while a Bloomberg measure of sovereign dollar debt rallied 11%. 

Tuesday's moves, however, signaled the broader concerns of investors that led to wide fluctuations last year were continuing. Besides China's patchy economic recovery, the disparity between market expectations of Federal Reserve interest-rate cuts and the central bank's own projections threatens to keep assets volatile.

Investors will be watching data releases Tuesday on Brazilian trade, Chilean economic activity and Mexican manufacturing trends. Meanwhile, they are also keeping an eye on tensions in the Middle East: Even as Israel withdrew some troops from Gaza, Iran sent a warship to the Red Sea in a potential escalation. 

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