London - Emerging shares slipped off two-month highs on Tuesday after a slew of dismal PMI readings, including in China where the yuan at new 5-1/2 year lows is increasing fears of a big slowdown that will ripple across developing economies.
Fears for the Chinese economy have been exacerbated by premier Li Keqiang saying it could be hard to sustain 6.7 percent growth in the second quarter, while sources last week told Reuters Beijing was prepared to tolerate a weaker yuan .
While data showed services activity touching 11-month highs in June, factory data has been poor and many doubt services can offset the manufacturing slowdown. The central bank set the yuan midpoint rate at 6.6594 per dollar, the softest since December 2010
Strategists polled by Reuters predicted the yuan to depreciate 1.5 percent by end-June 2017, on top of the 2.4 percent lost since January. Against trading partners' currencies, it has fallen 6 percent.
MSCI's emerging equity index fell 1 percent after four days of gains, while most Asian currencies slipped against the dollar and the rand, also closely correlated to the yuan, lost 1.4 percent
A survey showed moreover that South Africa's private sector slipped back into contraction in June after expanding for the first time in a year in May. That dismal picture was mirrored elsewhere as PMIs showed economies from India to Kenya to Singapore struggling to boost growth.
Luis Costa, head of CEEMEA debt and currency strategy at Citi, said the China moves indicated it was time to lighten up on emerging markets exposure.
“There are several reasons why risk should start selling off once again. The spikes in dollar/yuan are once again suggesting the capital outflow pressure hasn't entirely ceased, and it has possible intensified over the past month,” Costa said.
Emerging and world stocks had rallied after initial losses sparked by Britain's June 23 vote to leave the European Union, as the result is seen postponing U.S. rate hikes while forcing more stimulus in Europe, Japan and Britain.
But sluggish emerging markets growth along with caution before Friday's U.S. jobs data will likely cap gains while sterling and European stocks have resumed their falls as the negative effects of Brexit become more apparent.
Domestic ructions in some countries are also impacting sentiment, with Poland for instance announcing a pensions shakeout by tightening control of mandatory retirement savings and shutting down state-guaranteed private schemes.
While de-facto nationalisation of savings was avoided, many fear that ploughing all future mandatory contributions into the state agency may undercut pension funds' role in capital markets.
The zloty touched a one-week low to the euro, falling 0.3 percent but other regional currencies were less affected. The Polish stock market rose 0.2 percent clawing back some of Monday's losses.
Poland is also potentially the hardest hit in the region from Brexit due to reliance on remittances and EU funds, but Erste Bank analyst Zoltan Arokszallasi said the countries could weather storms better than in 2008.
“What is happening with regards to Brexit is growth negative, but it is also inflation negative, so because these countries are much more resilient now with lower external indebtedness and higher central bank reserves, we did see a strong decline in bond yields last week which we think is justified,” he said.
Polish 10-year yields fell to nearly three-month lows last week while Hungarian yields touched two-month lows.
Arokszallasi does not expect Poland's central bank to move interest rates on Wednesday but noted it would be the first meeting chaired by new governor Adam Glapinski who would likely express his view on the economic fallout from Brexit.
REUTERS