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Emerging stocks set for 6th losing day; yuan pummelled

Emerging stocks set for 6th losing day; yuan pummelled

Emerging equities were set for their sixth straight day in the red on Thursday as the global stocks rout continued, while China's yuan tumbled almost one percent despite healthy Chinese trade data as investors eyed potential capital outflows.
MSCI's benchmark emerging equities index was down 0.2 percent, but the losses were muted compared to Tuesday's 2.7 percent slump - the biggest fall in almost two years.
Higher 10-year US Treasury yields kept up the pressure on emerging market assets which have been caught in the downdraft of the global equities sell off. This was triggered by last Friday's data showing a pick up in US wage growth, with investors spooked by the prospect of faster tightening.
Chinese assets took some of the heaviest losses, with the yuan set for its worst day since January 2017 after sliding almost 1 percent. Chinese mainland stocks also tumbled 1.4 percent, plumbing six-month lows.
The moves followed the news that China had resumed an outbound investment scheme after a two-year hiatus, signalling that Beijing is less worried about capital outflows.
Per Hammarlund, chief emerging markets strategist at SEB, said there was pent-up demand for outbound investment:"But it doesn't seem to me that it will reverse the strength of the yuan this year - it's a temporary dip. It's just a reaction to the fact that there will be some money coming out of the country."
The tumble also came despite solid Chinese imports and exports for January, with some market participants focusing on the trade surplus, which narrowed to its lowest since a deficit in February last year. That prompted concerns that a strong currency was hurting the economy.
But Hammarlund said there was more good news than bad in the data."Imports were stronger than anticipated and that's good news for China's trading partners and neighbouring countries."
India, the other big Asian manufacturing engine, outperformed, gaining over 1.2 percent, but emerging Europe was mainly on the backfoot with Poland and Turkey down 0.5-0.8 percent.
Currencies also struggled in the face of a stronger dollar with South Africa's rand down 0.5 percent.
All eyes remain on talks in the ruling ANC party over President Jacob Zuma's future, after Zuma's state of the union speech was postponed triggering bets his departure is imminent.
"It's a sign they are getting close to an agreement that he will leave office," said Hammarlund, adding that Zuma would probably be gone before a parliamentary vote of no confidence scheduled for Feb. 22.
The average yield spread of South African sovereign dollar bonds over US Treasuries on the JPMorgan EMBI Global Diversified index was 7 basis points (bps) wider at 225 bps. South African five-year credit default swaps also widened 3 bps from Wednesday's close to 148 bps, IHS Markit data showed.
Angola's 2025 dollar bond fell 0.7 cents after Moody's placed the country's B2 rating on review for a downgrade, citing the deterioration of the government's balance sheet.
Venezuela has called a presidential election for April 22 after talks between the leftist government and opposition coalition collapsed, setting the stage for the likely re-election of President Nicolas Maduro.
The US said it was closer to deciding whether to impose sanctions on Venezuelan oil.


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