Emerging markets rocky, as dollar dips before Fed minutes

Fears about China's economy kept emerging markets under heavy pressure on Wednesday, while the dollar eased as traders awaited minutes from last month's Federal Reserve meeting for any hints on U.S. rate hike plans. On another rollercoaster day in Asia, Chinese shares plunged again before ending higher, Vietnam devalued its currency and Japan's Nikkei index took its biggest fall in more than a month. European shares fell and index futures suggested the downbeat tone would carry over to Wall Street . In Germany, lawmakers overwhelmingly voted in favour of a third Greek bailout, increasing the likelihood Athens would be able to make a loan repayment to the European Central Bank later this week.

The main European equity markets were down between 0.7 and 1.2 per cent and safe-haven government bonds were back in favour. The dollar weakened broadly pending the Fed’s minutes and US inflation data that could signal whether the central bank is on track to raise interest rates next month. It would be the first rise in almost a decade, but rocky emerging markets and a renewed slump in commodity prices that will drag on inflation are raising doubts about the timing. Any mention of the slowdown in China or worries about oil prices trading near six-year lows could be seen as a sign the Fed is prepared to wait longer.

"The thing everybody is watching on a day-to-day basis is the whole EM complex. There are all sorts of wobbles going on in China and the market is all over the place," Gavin Friend at National Australia Bank in London.

The Shanghai and Shenzhen markets fell more than 4 per cent early on, but state-backed buyers moved in later in the day, enabling both to finish up more than 1.2 per cent. It is a pattern that has been repeated several times since Beijing’s “national team”, a coalition of state-backed financial institutions and regulators, went into action early last month with instructions to halt a crash in share prices. After last week’s devaluation, spot yuan closed at 6.3955 per dollar, slightly weaker than Tuesday’s close of 6.3938.

“We think yesterday’s stock market crash (in China) reinforced yuan depreciation sentiment, which will encourage more capital outflows, necessitating more open market operations and ultimately a reserve requirement ratio cut in the current quarter,” strategists at ING wrote.

Good as gold

Oil was still weak after its brief bounce on Tuesday, weighed down by prospects of US demand weakening in autumn and the slowdown in Asia’s leading economies. US crude futures were down 0.5 per cent at $42.39 per barrel, edging back towards a 6-1/2-year low of $41.35 struck on Friday. Brent crude was three cents higher at $48.84 a barrel, but still in reach of 6-1/2-month troughs. But copper prices, which had slid to a six-year low of $4,983 a tonne, breaking the psychological $5,000 level, recovered to $5,013.

Gold, one of the few metals to benefit from the EM turmoil, was up a tick at $1,121 an ounce. The euro, helped by the dollar’s dip, traded at $1.1037 , having hit a one-week low of $1.1016 on Tuesday. Sterling was steady at 1.5660 while the yen inched up to 124.35 to the dollar.

“The market will be most interested in where U.S. inflation comes in, because this is something that will determine not just when the Fed begins to normalise policy but also the pace at which they tighten, going forward,” said Barclays FX strategist Hamish Pepper in London.

Reuters