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EM-Shares at 7-month lows as China rout spills over

Extending heavy losses to a third session, as a sharp sell-off in Chinese stocks continued.
Image: Kiyoshi Ota/Bloomberg

Emerging market stocks slid 2% to a seven-month low on Tuesday, extending heavy losses to a third session, as a sharp sell-off in Chinese stocks continued.

China’s blue-chip index dropped 3.5% to its lowest in nearly eight months as worries lingered about regulatory crackdowns in the education and property sectors.

Hong Kong’s benchmark sank almost 4.5%, with losses over the past three days pushing the index more than 8% into the red for the year.

The Chinese yuan hit its lowest since April, weakening 0.4% to trade at 6.504 to the dollar.

“The question for investors is whether the sell-off presents an attractive opportunity to bottom fish,” said analysts at BCA Research.

“We argue otherwise and expect further pressure from regulators to continue to weigh down on Chinese stocks over a six- to 12-month horizon,” they said, adding that the medical industry could be the next target.

Adding to worries around China, profit growth at industrial firms slowed for a fourth straight month in June, while a surge in the Delta variant Covid-19 cases centred on the eastern city of Nanjing.

MSCI’s index of Asia shares excluding Japan hit its lowest so far this year, as did a broader index of EM equities as China stocks have the biggest weightage on both. Western European bourses traded well in the red, while US stock indexes looked set to retreat from all-time highs.

South Africa’s main index lost 1.7%, moving sharply away from 1-1/2-month highs, while Turkey’s index extended losses to day four. Polish stocks led losses across eastern Europe.

Tunisian bonds stabilised after their worst slide in a month on Monday following the government’s ouster by President Kais Saied.

Saied extended existing Covid-19 restrictions on movement on Monday and vowed any violent opposition would be met with force.

In currency markets, the South African rand slid 0.7% against a strengthening dollar ahead of the US Federal Reserve’s policy decision on Wednesday.

Investors are hoping to get clues on the world’s largest economy’s standing, as well as any hints on the timeline for stimulus tapering and interest rate hikes.

Massive support from major central banks and ultra-loose monetary policy to stimulate economic activity and growth has helped inflows into riskier assets of emerging markets.

Turkey’s lira and Russia’s rouble were broadly flat. Hungary’s forint was steady against the euro, staying near three-month lows ahead of a central bank meeting. An extension of a hiking cycle with a 20 basis-point increase in its base rate to 1.1% is expected.

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