Investors retreated from riskier assets in the bond market in the past week amid a flare-up in tensions between the US and China over trade and renewed concerns about global economic growth.
Emerging market bond funds posted $2.6bn in outflows in the week to Wednesday, according to EPFR Global, the largest net redemptions in almost a year.
Meanwhile, China’s offshore renminbi weakened to its lowest level since November, in the worst week for EM currencies since the Turkish lira crisis last summer. MSCI’s broad index of EM currencies fell 0.9 per cent, its biggest weekly drop since August when Turkey’s currency was in free fall, and fifth consecutive week of declines.
The offshore renminbi is the “focal point” for trade tensions, analysts at ING said. “Were it to hit 7.00, alarm bells would ring even louder around the world.”
Following the return of risk appetite in the first quarter after a dovish tilt from the world’s central banks, investors were spooked in May by a flare-up in the US-China trade war. Renewed concerns also emerged about risks in Argentina and Turkey while more evidence emerged of China’s economic slowdown.
It was reported this week that Chinese retail sales grew at their slowest pace in almost 16 years in April and industrial output came in short of estimates, raising concern that stimulus measures were tapering off as trade tensions with the US were reignited.
“On the margin we have been reducing risk,” said Ken Orchard, a portfolio manager at T Rowe Price. “I have become a little disconcerted. The macroeconomic data has not improved as much as I expected.”
Alongside the shift away from emerging market debt, investors also withdrew $2.6bn from US junk bond funds, another speculative area, for the largest net outflow this year. US investment grade debt, which has higher credit ratings than junk bonds, had modest inflows of $434m.
Equity funds were also punished with the second consecutive week of outflows in the range of $20bn.
It is another sign that investors were moving away from riskier investments and bracing for a potential economic downturn.
“We could see some softening going into next year,” Mr Orchard said. “It’s not the dominant scenario yet but we have to consider that a US recession is a real possibility.”
With additional reporting by Philip Georgiadis in London