Emerging Market Rout Deepens With No End In Sight

A rout in emerging market (EM) stocks and currencies has deepened amid a series of devaluation events, oil prices at a six-year low and continuing to plunge amid a global glut, concerns about the U.S. Fed hiking interest rates, and growth concerns in China.

Indeed, last week was a rough week for emerging markets: EM currencies fell for a ninth straight week to extend their longest run of losses this century as they fell to a new record low, EM stocks had their worst week since 2012 and are at the lowest level since 2009. 

In EM currencies, it is a “race to the bottom”, as this Zerohedge chart illustrates:

The MSCI Emerging Markets Index, a benchmark for emerging market equities, fell 2.2 percent on Friday to total a 6 percent decline last week, the worst weekly decline since May 2012.  The index closed at 812.384 on Friday, which is the lowest level since July 2009.

Furthermore commodity prices have also taken a beating, as Bloomberg reported on Friday that its Commodity Index has fallen to the lowest level since 2002, while oil had the longest run of weekly declines in almost 30 years.

EM stocks have now slid below a trading band for the first time since October 2011, ending a pattern that technical analysts call a “channel” in favor of bears which signals further losses.

“Lots of negative news from emerging markets this week, we are seeing big concerns about what is going to happen in China next, issues in Brazil, Turkey,” David Kelly, Chief Global Strategist at JPMorgan, told Bloomberg. “What’s also weighing on markets is uncertainty as to what will happen when the Fed raises interest rate, there is uncertainty about how the markets will handle the rate increase.”

The initial selloff in emerging markets started back in late April, but has picked up speed following China’s initial move to devalue its currency two weeks ago, which sent global stocks, currencies, and commodities tumbling and pushed emerging market stocks into a bear market.

Emerging Market Stocks Fall Into Bear Market As China Devalues http://t.co/uVMCe09EQ7

— EMerging Equity (@EM_Equity) August 12, 2015

As China continued to devalue its currency for three straight days, fears grew that other regional Central Banks would follow suit with their own currency devaluations, as such countries are attempting to maintain their own competitiveness against China.

This was confirmed as Vietnam became the first to follow in China’s footsteps, taking action last week and again on Wednesday as it decided to devalue its currency for the third time this year and also widened its trading band.

This was then followed by Kazakhstan’s decision on Thursday to scrap efforts to prop up its currency and shift to a free float and pursue inflation-targeting monetary policy.

Following the move, Kazakhstan’s currency plunged by 23 percent to an all-time low, in addition to rattling an already fragile market and sparking a sharp global equity selloff.

EM Currencies Perfectly Positioned To Crash Following The Devaluation Events in China, Vietnam And Kazakhstan http://t.co/G2sfcKXKZj $CEW

— EMerging Equity (@ETFalpha) August 21, 2015

According to Bloomberg, over $3.3 trillion has been wiped out from global equities following China’s move.

Last week — as the selloff in EMs intensified — Taiwan, Brazil, and Indonesia joined China as they fell into a bear market, while Turkey and several other nations are on the cusp of a 20 percent retreat from their peaks earlier this year.

The largest exchange traded fund (ETF) that tracks South Korean equities, The iShares MSCI South Korea Capped ETF, just saw the largest weekly outflow since its inception back in 2000.

The Shanghai Composite Index fell 4.3 percent on Friday and came within one point of its low during a $4 trillion selloff last month. Shanghai’s index lost 11.5 percent on the week.  China’s CSI300 fell 4.6 percent on Friday and lost 11.9 percent on the week.

The largest ETF that tracks large cap Chinese Equities, the iShares FTSE China 25 Index, which has a $6 billion market cap, has fallen over 30 percent since April 29 and is down over 12 percent on the year.

A preliminary manufacturing gauge for China that was released on Friday showed that Chinese manufacturing was at the lowest level in over six years during the depths of the global financial crisis, suggesting that authorities will need to step up further policy support to combat a deepening slowdown.

As this recent data suggests, the economic slowdown in China could be getting worse, and is likely to thus deepen the rout that we are seeing in emerging markets and a selloff in global markets.

A recent survey from Bloomberg suggests that China’s economy only expanded 6.3 percent in the first half of 2015, compared to the officially reported 7 percent growth rate, based on a median estimate of 11 economists polled by the news agency.

The survey shows that growth in China for 2015 may only register at a 6.6 percent clip, versus the official “about 7 percent” growth target for 2015 that the government has set forth, which adds additional pressure on authorities to do more to meet Premier Li Keqiang’s target.

China’s economic growth in the first quarter (Q1) of 2015 reached the slowest quarterly pace in six years at 7 percent from a year earlier, this was followed by the same growth rate in the second quarter (Q2) which beat economists’ estimates for 6.8 percent growth.   Growth has suffered in China due to a combination of an industrial slowdown, a weak housing market, and mounting local debt.

However, a growing number of economists and investment firms are doubting the validity of the growth figures that are being released from Beijing, and suspect that growth figures are much further lower.

China’s Growth May Have Only Clocked 6.3% In First Half, Full Year At 6.6% — Bloomberg Survey http://t.co/PNyr9nlBmp pic.twitter.com/eOAMPKPxSh

— EMerging Equity (@EM_Equity) August 18, 2015

For example: Oxford Economics believes that China’s economic growth is actually running at a pace closer to 4 to 5 percent, Capital Economics estimates 4.9 percent, The Conference Board estimates 4 percent, and Lombard Street Research estimates 3.8 percent.

According to NN Investment Partners, there has been $1 trillon of investment outflows from emerging markets over the past 13 months through the end of July, nearly double the net outflow during the nine months following the 2008 banking collapse.  However the outflows from EMs in August is not yet known and will increase as the EM rout deepens.

The benchmark MSCI Emerging Markets Index has fallen 15.1 percent so far this year and are poised for the worst August losses since 1998.  In comparison, the MSCI World Index has lost 3.4 percent so far this year.

The largest exchange traded fund (ETF) that tracks emerging market equities, the Vanguard Emerging Markets Stock Index, which has a $40 billion market cap, has fallen over 24 percent since April 29 and is down over 15 percent on the year. The second largest EM ETF, the iShares MSCI Emerging Markets Index, which has a $22 billion market cap, has fallen 25 percent since April 29 and is down over 16 percent on the year.

As we start up the new week there is no break from the rout as Middle East stock markets tumbled on Sunday and suffered their worst losses on the year. According to Bloomberg, on Sunday the Bloomberg GCC 200 Index, which tracks 200 stocks in the six-nation Gulf Cooperation Council, plunged nearly 6 percent, the most since October 2008.

Dubai’s DFM General Index led Gulf losses with a 6.96 percent plunge on Sunday as it edges closer to a bear market, after tumbling 18 percent from its earlier 2015 peak.

Saudi Arabia’s Tadawul All Share Index plunged 6.9 percent on Sunday and fell into a bear market, after tumbling 24 percent since reaching its 2015 peak in April, which marks its second bear market in less than a year.

In addition to a sharp selloff in Dubai and Saudi markets on Sunday, other regional markets also plunged:  Egypt’s EGX30 Index fell 5.4 percent, the most since November 2012.  Qatar’s QE Index fell 5.3 percent. Abu Dhabi’s ADX General Index fell 5 percent.  Israel’s TA-25 Index fell 4.1 percent, the most since September 2011.

As Asian trade opened up on Monday morning the rout continued as Tokyo’s Nikkei 225, South Korea’s KOSPI Index, and Australia’s S&P/ASX 200 Index fell over 2 percent; shortly thereafter, China’s CSI300 Index and the Shanghai Composite Index nosedived over 8 percent — the most since February 2007, Taiwan’s Stock Exchange sank as much as 7.5 percent — the most since 1990, the Philippines PSEi Index tumbled 6.5 percent, Indonesia’s Jakarta Stock Exchange Composite Index declined 5 percent, Vietnam’s VN Index fell 5 percent, India’s BSE Sensex Index fell nearly 4 percent, U.S. S&P500 and Dow futures fell over 2 percent, and crude oil fell over 2 percent to break under the $40 support level for the first time since March 2009 as Bloomberg reported that its Commodity Index fell to the lowest level since 1999.

Asian Financial Crisis Redux?: EM currencies continued to fall in Asian trade on Monday as Malaysia’s ringgit fell to its lowest level since August 1998 and Indonesia’s rupiah fell to its lowest level since July 1998.

Asian Financial Crisis Redux?: Is Malaysia Set To Introduce Capital Controls, Currency Peg? http://t.co/RPhxwNxZ04 pic.twitter.com/e92RHav3g7

— EMerging Equity (@EM_Equity) August 17, 2015

There appears to be no end in sight to the EM rout and global market selloff as pressure continues to mount with oil prices continuing to plunge amid a global glut, economic growth in China slowing, alongside a growing number of concerns.

Have we already entered the beginning of the next global financial crisis?  It certainly appears to be shaping up that way.  Can Central Banks step in to help avert such a crisis?  Probably not, as most have run out of firepower.  How bad will it be this time?  Only time will tell.