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Emerging markets set for weekly drop

Kuala Lumpur - Emerging-market stocks and currencies headed for weekly declines as a rally following Britain’s vote to leave the European Union lost steam amid concerns about the outlook for the world’s largest economies.

Nine out of 10 industry gauges in the MSCI Emerging Markets Index retreated from July 1.

Chinese equities pared their advance, and the yuan headed for a fifth weekly drop amid speculation the central bank favours further depreciation as it seeks to revive economic growth.

Brazil’s real and Mexico’s peso led declines in developing-nation currencies, while South Korea’s won and Malaysia’s ringgit dropped the most in Asia.

A rally fuelled by speculation that central banks will boost stimulus after the UK’s Brexit verdict is fading as focus shifts to a US payrolls report Friday and a slew of Chinese economic data due next week.

Federal Reserve officials flagged concern over job creation at their June review, and minutes of that meeting released Wednesday showed they were losing confidence in the US economy’s ability to withstand an interest-rate hike.

Flows into emerging market debt funds set a weekly record as investors sought safer assets.

'Still cautious'

"Markets are finally digesting the uncertainties from Brexit and everybody seems to be still cautious," said Christopher Wong, a Singapore-based senior investment manager at Aberdeen Asset Management, which oversees $379bn globally.

"People would still be watching familiar topics like what the Fed and China will do, and how corporate earnings would behave. It’s going to be volatile until probably the end of the year."

The MSCI Emerging Markets Index fell 0.4% to 823.51 as of 1:08 p.m. in Hong Kong on Friday, set for a 1.9% weekly decline. The gauge posted its biggest five-day gain in four months in the period ended July 1.

It has advanced 3.7% this year and is valued at 11.8 times the 12-month estimated earnings of its constituents. That compares with a multiple of 15.7 for the MSCI World Index, which is down 1.2% in 2016.

Nine out of 10 industry gauges in the emerging-market index dropped as Chinese equities pared its weekly advance before a string of economic data to be released next week while a survey showed investors are still concerned about a deepening economic slowdown.

Stocks retreat

The Hang Seng China Enterprises Index of mainland stocks listed in Hong Kong dropped 1.1% from Thursday. The Shanghai Composite Index fell 0.9%, headed for its biggest drop since June 24, paring its weekly gain to 2%.

Friday’s losses come after the Shanghai gauge emerged as one of the world’s best-performing equity benchmarks since the Brexit vote. Recent gains were underpinned by expectations that Chinese authorities will take steps to support an economy that grew last year at its weakest pace in a quarter century.

Equity gauges in South Korea, Vietnam, India and Thailand fell at least 0.3%, while benchmarks in Sri Lanka and the Philippines headed higher for the day. Markets in Indonesia, Pakistan and the Middle East remained shut.

The MSCI Emerging Markets Currency Index retreated 0.2%, taking its weekly decline to 0.9%. The measure advanced 1.3% in the five days ended July 1, its biggest gain in three months.

Currencies, bonds

The real fell 3.9% in the four days through Thursday, on course for its biggest weekly drop since October.

Mexico’s peso was set for its worst week in two months with a 2.3% decline. The yuan depreciated 0.3%, South Korea’s won retreated 1.3% and the Malaysian ringgit lost 1.2%.

Government bonds in Asia rallied, with the yield on Taiwan’s 10-year notes heading for a seventh weekly decline, the longest stretch since the securities were sold in January.

The yields on similar-maturity debt in India, Malaysia, Thailand and South Korea also fell in the period.

"I don’t think we’re going to see much more downside" to currencies, said Stephen Innes, a senior foreign exchange trader at Oanda Asia Pacific Pte in Singapore.

"The market’s coming to grips with the sense that Brexit is going to be an isolated issue between Britain and the EU. I’m getting a little bullish on emerging-market currencies."

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