LONDON (Aug 17): Emerging equities were set for their worst week since February after sliding into bear territory while currencies came under fresh pressure on Friday, with Turkey's lira taking another tumble despite central bank measures earlier in the week.
MSCI's benchmark emerging stocks index ended the week on a slightly calmer note, up 0.2%, and snapping a seven-day losing streak on tentative optimism that US-Sino relations may improve with the scheduling of the first trade talks since June.
The hope is this will resolve a tariff war that threatens to curb global economic growth at a time when the US Federal Reserve is raising interest rates, creating difficulties for emerging market economies that have high external borrowing requirements.
But emerging stocks were still set for their worst weekly sell off since February, down 3.5%, after clocking up their longest run of daily losses since a January-February rout.
Investors rattled by events in China, Turkey and South Africa have pulled US$1.3 billion from emerging market stocks in the last week and US$100 million from emerging bonds according to the Institute of International Finance, which tracks financial flows.
"Tail risks have increased ... and we are cautious in the short term given the escalation of risks in key EM economies," said Ewout van Schaick, head of multi-asset at NN Investment Partners.
Chinese mainland shares fell for a fifth straight day, slipping about 1.4% as a vaccine scandal clobbered healthcare shares.
Other emerging bourses delivered a mixed performance with Polish shares down 0.7% while South Africa stocks leapt 1.3%.
Currencies also painted a sombre picture. After three days of gains, Turkey's lira weakened again, slipping more than 4% and crashing again through the sensitive 6 to the dollar level. However, thanks to recent gains the currency was on track for its best weekly performance since the financial crisis in 2008. The lira is still down 37% year-to-date.
Investors gave Finance Minister Berat Albayrak the benefit of the doubt after a conference call on Thursday at which he tried to reassure them that Turkey would emerge stronger from the currency crisis.
"He highlighted that the country has a strong track record of crisis management and that the key has been sound fiscal policy and it will be this time also," said Richard Segal, a strategist at Manulife Asset Management.
However, Washington warned that Turkey should expect more economic sanctions unless it hands over detained American pastor Andrew Brunson.
Turkish longer-dated dollar bonds booked losses, while the credit default swaps curve remains inverted, indicating the level of strain. Turkish stocks fell 1.4%, and were down 9.4% for the week. S&P Global is scheduled to publish its latest review of Turkey later in the day.
China's yuan was on course for a record 10th straight week of losses, down 0.5% for the week. The currency has lost about 9% of its value against the dollar since the end of March. On Thursday, Chinese regulators barred banks from using some interbank accounts to deposit or lend yuan offshore through free trade zone schemes, making it more expensive to short the currency in an attempt to stem the depreciation.
South Africa's rand weakened 1.4% and was on track for a near 6% weekly decline, while Russia's rouble and Mexico's peso also slipped.
Across central European markets, Hungary's forint was a touch firmer against the euro, with investors waiting to see if S&P Global will upgrade the country's sovereign rating after markets close.
Emerging market borrowing costs also continued to climb, with the JPMorgan EMBI hard currency sovereign debt index at 365 basis points, its highest in a week.