EMERGING MARKETS-Disappointing China data drags EM stocks to two-month low

Emerging market stocks slumped on Wednesday as a faster-than-expected slowdown in China's factory activity exacerbated fears of a weak recovery in the world's second-largest economy, while Turkey's lira continued its descent to all-time lows. The MSCI's emerging market (EM) stocks index dropped 1% to its lowest level in over two months, with stocks in mainland China and Hong Kong spearheading declines, down 1.0% and 1.9% respectively.

Emerging market stocks slumped on Wednesday as a faster-than-expected slowdown in China's factory activity exacerbated fears of a weak recovery in the world's second-largest economy, while Turkey's lira continued its descent to all-time lows.

The MSCI's emerging market (EM) stocks index dropped 1% to its lowest level in over two months, with stocks in mainland China and Hong Kong spearheading declines, down 1.0% and 1.9% respectively. The yuan was at its lowest against the dollar since the end of November, after China's manufacturing purchasing managers' index (PMI) fell to a five-month low of 48.8, missing forecasts for an increase to 49.4. EM stocks are on track for their second straight month in the red, down 1.8% in May, largely pressured by mounting evidence of China's faltering economic growth, burgeoning Sino-U.S. tensions and uncertainty around the U.S. debt ceiling deal.

"Over the past few weeks, EMs have been repricing the positive narrative regarding the Chinese reopening. We're still expecting better growth than in DM (developed market) countries but the case for EM growth outperformance is weakening," said Guillaume Tresca, Senior Emerging Market Strategist at Generali Investments. Currencies in the region were down 0.2% on Wednesday and also headed for monthly losses of nearly 1%.

Turkey's lira tumbled to a record low of 20.75 to the dollar, while the country's sovereign dollar bonds eased after gains on Tuesday. After incumbent President Erdogan's victory in Sunday's runoff vote, the focus has shifted to impending decisions on top cabinet appointments, with a meeting this week between Erdogan and former economy chief Mehmet Simsek spurring speculation about a possible pivot to more conventional monetary policy.

"If (Simsek) is appointed, maybe the initial reaction for foreigners would be positive based on the idea that something would change. But I would need to see changes in the central bank's strategy, in the economic strategy, otherwise, it's just an appointment," Tresca said. Data showed Turkey's economy expanded 4.0% in the first quarter of the year, just above expectations, growing strongly despite the impact of February's devastating earthquakes.

The dollar hovered near ten-week highs with a deal to suspend the U.S. debt limit advancing to the full House of Representatives for debate and an expected vote on passage on Wednesday. The South African rand fell 0.4% against the dollar, hovering near an all-time low hit recently. The currency has lost over 7% this month, pummelled by a crippling power crisis and geopolitical tensions.

The Polish zloty was down 0.1% against the euro but came off a one-week low hit earlier in the session. Poland's statistics office said the country's gross domestic product fell 0.3% year-on-year in the first quarter. Elsewhere, the Kenyan central bank governor nominee plans to push for local dollar bond issuance with the finance ministry once in office, he said, citing residents' domestic holdings of foreign currency.

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