EMERGING MARKETS-Stocks hit 2020 lows, Sri Lankan bonds extend losses

Stocks in emerging markets plummeted to over one-year lows on Tuesday as worries about economic growth intensified a risk-off in financial markets, while Sri Lankan bonds sank to new lows amid continued turmoil in the island nation. The 2025 sovereign dollar bond suffered the biggest losses, down as much as 1.125 cents, with bonds trading between 25-27 cents to the dollar, Tradeweb data showed.

Sri Lanka's main opposition party will nominate its leader, Sajith Premadasa, as the country's next president during elections on July 20, a party official told Reuters. "The resignation of President Rajapaksa would be viewed by investors as marginally market positive insofar as it might help remove a focal point of social unrest (though protests may persist)," said Johanna Chua, head of Asia economics and strategy at Citi Global Markets Asia.

"Although the leadership vacuum could delay IMF negotiations, we estimate delays will be temporary, possibly by a month or so." MSCI's emerging markets (EM) stocks index fell 1.4% in a second consecutive day of losses to levels not seen since the June 2020 pandemic-driven selloff.

A surge in inflation worldwide, rising interest rates and a slowdown in economic growth have been a headache for EM assets, with investors worrying that China's COVID-19 shutdowns and Russia's war on Ukraine could further weaken the outlook. The benchmark equities index is down more than 20% this year. Heavyweight China stocks fell more than 1% as fears of strict coronavirus curbs in Shanghai re-ignited worries of economic disruption. The yuan slipped 0.3% against the dollar.

"If the COVID situation can be contained without further downward growth revisions, the diverging near-term growth outlooks in China and the U.S. can create interesting opportunities for the renminbi," said Natalia Gurushina, EM Fixed Income economist at VanEck. "If there are no negative surprises on the outflows front, this can lead to renminbi strength vs. U.S. dollar."

As the dollar marched higher, major EM currencies were weaker, with the Indian rupee collapsing to a record low and the South African rand off 0.3% to 21-month lows. The Polish zloty slipped 0.4% against the euro as central bank forecasts showed Poland will see inflation peak at 18.8% and economic growth fall to as low as 0.5% in the first quarter of 2023.

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