(Corrects paragraph six to real inflation being interest minus
By Carolyn Cohn
LONDON Feb 3 Emerging stocks dipped on Monday,
adding to two loss-making weeks, dragged further down by Chinese
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 in
January, showing growth slowing in manufacturing as well as
That is likely to weigh on emerging markets that export to
China, and MSCI's main emerging equity index eased 0.3
percent after January's 6.6 percent loss.
"The question is at which point the weakening process will
fade and we see normalisation," said Luis Costa, 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
half-way 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
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
eight 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," said Costa.
"Markets are already hiking on behalf of central banks. It
becomes a vicious cycle."
Russia's rouble approached five-year lows after data
showing Russian manufacturing shrinking for the third month in a
row. South Africa's PMI also stayed below the 50 threshold that
The Ukrainian hryvnia fell half a percent to fresh
four-year lows as embattled President Viktor Yanukovich returned
to work after four days of sick leave.
Ukrainian five-year credit default swaps rose 13 basis
points to 1,050 bps, according to Markit, their highest since
mid-December, before Ukraine got a Russian bail-out.
In Asia, Seoul stocks fell more than 1 percent after
the China data, and in a delayed response to a further cut in
stimulus by the U.S. Federal Reserve after a holiday closure,
even though local PMIs at eight-month highs indicated signs of a
growing export-led recovery. The won had its worst day in
Thai stocks rose 1.5 percent, after elections went
ahead more peacefully than expected, but the baht gave up
some of its earlier gains as anti-government protesters ignored
Sunday's vote and continued efforts to topple Prime Minister
Emerging sovereign debt spreads tightened 2 basis
points to 397 bps over U.S. Treasuries, after widening 50 bps
"The combination of weakening Chinese data and the gradual
turn in Fed policy will continue to fuel negative sentiment,"
said strategist Kit Juckes at Societe Generale in a note.
"Flows of money into EM since 2010 have been huge. The path
back towards any kind of neutral Fed policy stretches ahead of
us and the Chinese economic slowdown is no flash in the pan. So
the drivers of the current turmoil aren't going to go anywhere
and any respite is likely to be temporary."
For GRAPHIC on emerging market FX performance 2014, see link.reuters.com/jus35t
For GRAPHIC on MSCI emerging index performance 2014, see link.reuters.com/weh36s
For GRAPHIC on MSCI emerging Europe performance 2014, see link.reuters.com/jun28s
For GRAPHIC on MSCI frontier index performance 2014, see link.reuters.com/zyh97s
For CENTRAL EUROPE market report, see
For TURKISH market report, see
For RUSSIAN market report, see )
(Reporting by Carolyn Cohn, Sujata Rao and Natsuko Waki Editing
by Jeremy Gaunt)