Emerging shares, FX dip after China warns on rare earth supply

Emerging market stocks and currencies fell on Wednesday as new headlines about the US-China trade dispute pressured markets, while uncertainty about cabinet appointments added to the South African rand’s woes.

As investors jettisoned riskier assets for safer plays, MSCI’s index of emerging market shares slipped 0.5% and its index of developing world currencies hit its lowest this year as most slipped against a steady dollar.

Reports by Chinese newspapers that China could use rare earths exports to the United States to strike back against US tariffs on Chinese goods was the latest development in the trade spat between the world’s largest economies.

Rare earths are chemical elements used in high-tech consumer electronics and military equipment that China is a supplier of. The warning comes after US President Donald Trump said Washington was not ready to strike a trade deal with China soon, but could in the future.

“The recent developments on trade are already reflected in EM currencies,” wrote strategists at UBS’s chief investment office. “Our base case remains for a bumpy road to an eventual trade deal later this year.”

The bitter dispute has hurt markets worldwide as well as global growth, and is partly responsible for poor economic data out of some economies in the emerging market space.

South Africa‘s rand touched its lowest in nearly eight months on investor anxiety about cabinet appointments. Deputy President David Mabuza was sworn in as a lawmaker on Tuesday, throwing a spotlight on corruption allegations that have hit the African National Congress’ popularity.

Mabuza was cleared by the ruling ANC of bringing the party into disrepute and has denied any wrongdoing. He is an ally of President Cyril Ramaphosa, who has pledged clean governance.

“With the political environment and the government’s aim to fight against corruption now questioned by the Mabuza news, ZAR will likely struggle further in the near term,” wrote Cristian Maggio, head of emerging markets strategy at TD Securities.

A dovish central bank and the reweighting of the MSCI index to include a higher China weight, are other near-to-medium term factors weighing on the rand, Maggio said.

Hungary’s forint moved marginally lower against the euro after the central bank held on interest rates on Tuesday, as expected, shrugging off a recent bout of forint weakness and rising headline inflation.

“While the central bank maintains such an accommodative monetary policy we think the forint will remain under pressure,” Credit Suisse analyst Alexey Pogorelov wrote in a note.

Emerging market shares mostly fell on the trade woes. Among outliers, South African shares climbed 0.3%, while Turkish equities attempted a rise.