Emerging markets retreat as China takes ‘two steps back’

Emerging-market currencies and stocks fell as disappointing data from China heightened investors’ anxiety surrounding the nation’s sputtering economy.

MSCI’s gauge of developing currencies sank 0.4%, headed for its biggest drop in a month, as currencies from South Korea to South Africa fell with the Chinese yuan. The key emerging-market equities index lost 0.9%, halting a two-day advance and on track for its largest decline in 1-1/2 weeks.

A private survey of China’s services sector showed activity expanded in August at the slowest rate this year, sapping investors’ earlier relief over the government’s additional stimulus for the embattled property sector. The weak data also overshadowed news that Chinese developer Country Garden Holdings Co. made coupon payments on two dollar bonds within grace periods, avoiding its first default.

“Sentiment has turned downbeat again on China as fresh brushstrokes are painted on the picture of its slowing economy,” Susannah Streeter, head of money and markets at Hargreaves Lansdown, said in an email. “China appears to be taking one step forward, but two steps back, as optimism one day turns to pessimism the next.”

The lira pared earlier losses and the banking index rose on news that the the World Bank is in advanced talks to potentially double its exposure to Turkey to $35 billion to help stabilize the Middle East’s largest non-oil economy.

Elsewhere, the Israeli shekel erased most of its earlier losses after the country’s central bank governor said interest rates are high enough to support the currency and ensure inflation slows to 3% or less by early next year.

In the debt market, Hungary is offering Eurobonds to help cover an increased need for financing after the budget deficit widened amid a suspension of European Union funding. The nation is marketing a 10-year euro-denominated benchmark at about 260 basis points above mid-swaps, according to a person familiar with the matter, who asked not to be identified because they’re not authorized to speak about it. The sale may price on Tuesday, the person said.