Emerging economies hit 40-day low as US-China trade tensions arouse

Emerging market shares hit a 40-day low on Wednesday as investors fretted about U.S.-China trade tensions, but a retreat in the dollar helped most developing world currencies stay afloat.

MSCI's index for emerging market stocks fell for a third straight day with Asian bourses taking the biggest hit as mainland China stocks tumbled. Hong Kong was down more than 1 per cent. Mixed trade data from China added to a cloudy growth picture for the world's second-largest economy with exports shrinking in April but imports surprising with their first increase in five months.

The impact of worsening trade conflict on global growth lifted the safe-haven Japanese yen against the greenback, benefiting most emerging market currencies. The focus was on South Africa's rand which rose 0.8 per cent as voters in the continent's most industrialised nation headed to the polls.

"The ZAR could rally if the (ruling African National Congress) wins at least 58 per cent of the votes," said analysts from TD Securities in a note. "But the chance of a 'weak victory' may meet a lukewarm market reaction and we could see a sell-off of a couple of percentages for the currency."

China's yuan strengthened 0.2 per cent following two days of hefty losses in offshore trading, while Russia's rouble climbed on the back of higher oil prices. Turkey's lira extended losses from Tuesday when the recession-hit country's currency saw its biggest sell-off in months after Istanbul's mayoral election results were scrapped.

President Tayyip Erdogan had pushed hard for the re-run after his ruling AK Party (AKP) lost control of Turkey's biggest city in the March 31 poll. In emerging Europe, Hungary's 8 per cent rise in annual industrial output growth in March exceeded all analyst forecasts but the forint barely moved as the upbeat data failed to expel inflation worries. Tuesday's weak eurozone outlook by the European Commission also weighed on currencies and bond yields in the region.