Currency traders gesture in front of screens showing the Korea Composite Stock Price Index, left, and foreign exchange rate at the Korea Exchange Bank headquarters in Seoul, South Korea, Monday, Feb. 3, 2014. South Korea's Kospi dropped 1.09 percent at 1,919.96 as Asian stocks fell Monday after Wall Street lost ground amid lingering jitters about weakness in the financial markets of some developing countries. (AP Photo/Ahn Young-joon)

Carolyn Cohn London

Emerging stocks dipped yesterday, adding to two loss-making weeks, dragged down further by Chinese data.

Hungarian assets fell on worries about the country’s high debt levels. A debt auction last week had to be cut short.

With many Asian markets, including China, still shut for the Lunar New Year holidays, trading volumes stayed thin. But China’s official purchasing managers’ index (PMI) dipped last month, showing growth slowing in manufacturing, as well as services.

That is likely to weigh on emerging markets that export to China, and MSCI’s main emerging equity index eased 0.3 percent after last month’s 6.6 percent loss.

“The question is at which point the weakening process will fade and we see normalisation,” said Luis Costa, an emerging markets strategist at Citi.

“We don’t think we’re there yet. The process of establishing real rates [interest minus inflation] in emerging markets is halfway through and we may see further interest rate hikes.”

India, South Africa and Turkey all raised interest rates last week, and markets are speculating Hungary may also need to hike.

Polish stocks and the zloty rallied after PMI data showing Polish manufacturing grew at the fastest pace in three years last month, while Czech activity expanded for the eighth month in a row.

Hungary’s PMI at 58.9 was far above the 52.4 average of the past three years, but stocks fell 1 percent and the currency dropped towards two-year lows hit last week.

Hungary is considered one of the central European economies most exposed to contagion from the emerging market sell-off, due to high debt levels and an aggressive rate-cutting cycle that has taken interest rates to a record low 2.85 percent.

“Hungary is being challenged by the market,” Costa said. “Markets are already hiking on behalf of central banks. It becomes a vicious cycle.”

Emerging sovereign debt spreads tightened 2 basis points to 397 basis points over US treasuries, after widening 50 basis points last month.

“The combination of weakening Chinese data and the gradual turn in Fed policy will continue to fuel negative sentiment,” Société Générale strategist Kit Juckes said in a note. “Any respite is likely to be temporary.” – Reuters