(Bloomberg) -- Emerging-market stocks declined for a second day and currencies halted a four-day rally as concerns grew that China’s deflation is spreading to its consumer economy and Donald Trump’s tariffs threaten US growth.
MSCI Inc.’s equity benchmark for developing nations fell 1.2% as of 10:17 a.m. London time, dragged by Hong Kong-listed Chinese stocks. All the industry subgroups on the gauge posted losses, with shares of consumer-discretionary companies underperforming. In the currency market, the yuan dropped for a third day, the while the Indian rupee and Thai baht trailed their peers.
China’s consumer inflation turned negative through January-February for the first time since 2021, widening the country’s factory-gate deflation that’s already sending the country toward the longest stretch of price contraction since the 1960s. Investors also had to contend with signs the US economy is set to slow from Trump’s tariff wars, a higher unemployment rate and federal workforce job cuts.
“Unease about the effect of Trump’s tariffs hangs over financial markets at the start of the week,” Susannah Streeter, head of money and markets at Hargreaves Lansdown Plc, wrote in a note. “The prospect of a recession in the US is lurking, with consumer confidence falling, companies facing increasing trade complexity. China’s deflation problem is also weighing on sentiment, and geopolitical concerns are staying in focus.”
The Hang Seng China Enterprises Index and the Hang Seng Tech Index both retreated more than 2% after weaker-than-expected inflation figures. While economists had expected consumer prices to turn negative on account of earlier-than-usual Lunar New Year holiday, the published figures showed the weakness had extended beyond that seasonal factor.
The latest consumer-price inflation reading was “a pretty good illustration that this deflationary environment is a permanent rather than transitory phenomenon,” said Dan Wang, China director at Eurasia Group. Overcapacity and a conservative monetary stance would prolong the deflation pressures, he added.
Investors, who had traded for months on worries that Trump’s tariff shocks will undermine growth in other countries, last week began to price in the possibility that they could hit closer to home.
Fears of a recession are coming from the potential tariff impact on inflation as well as federal spending cuts that are not being replaced by private spending, BNP Paribas’s Chief Economist Isabelle Mateos y Lago said on Bloomberg Television.
The soured sentiment echoed in South Africa’s rand, where one-week implied volatility rose to a four week-high. Traders were also anxious about a wrangle in the ruling coalition over an upcoming budget.
Sovereign dollar bonds of Poland, Romania and Malaysia were among the best performers in emerging markets Monday. Investment-grade bonds from emerging markets are outperforming junk-rated debt for the first time in five years, year-to-date data show.
Romania banned far-right candidate Calin Georgescu from its presidential election, triggering street protests and risking the wrath of the Trump administration, which had taken up his cause.
Hungary’s 10-year sovereign yield rose and the forint maintained its losses as the country reported a deepening budget deficit.
--With assistance from Shen Hong.