The emerging market stocks benchmark has wiped out its gains for the year, while the currency index hit a new annual low, influenced by postponed global monetary easing and China's sluggish economic recovery.
A shift in investor sentiment towards risk aversion has been observed as expectations for a U.S. Federal Reserve interest rate cut have been pushed from September to November. This change in outlook was prompted by U.S. retail sales data indicating the resilience of the world's largest economy, even with borrowing costs at their highest in 23 years, further pressuring emerging market currencies due to the dollar's strength.
The decline in emerging market assets gained momentum following China's announcement of its economic growth figures, which, despite exceeding expectations, hinted at a potential slowdown. The details revealed a decrease in retail sales growth and industrial output not meeting expectations in March.
Concerns over China's economy have escalated with the European Union's introduction of trade restrictions, investigating subsidies for electric vehicles and other sectors, potentially affecting China's economic stance globally.
The yuan's depreciation to its lowest since November led to widespread sell-offs across Asian currencies, exacerbated by the People's Bank of China's unexpected weakening of the yuan's daily reference rate. The Indonesian rupiah was notably affected, experiencing significant losses against the dollar.
The MSCI Emerging Markets Index saw a significant drop, marking its largest decline since January and trading 1% lower for the year. Concurrently, the index for emerging market currencies also fell, contributing to a year-to-date decline. The Indian rupee and South Africa's rand experienced notable depreciations.
China's economic performance and the delayed Federal Reserve pivot have prompted calls for more aggressive measures from the central bank to stabilize growth. Meanwhile, the dollar bond market saw Sri Lanka leading losses amid unsuccessful restructuring talks, affecting investor confidence in several countries.
Geopolitical tensions in the Middle East have also influenced market sentiment, with Israel's military response to Iran's aggression affecting the shekel's value. In Europe, Hungarian assets have underperformed due to budget deficit concerns, impacting both the sovereign bond yields and the forint.
