Emerging Markets on Edge Amid Awaited Reforms from China and Potential Trump 2.0

Emerging markets stocks and currencies experienced a slight decline as investors awaited reforms from China and speculated on the impact of a potential second Trump presidency. Concerns about inflation, trade relations, and fiscal policies were key factors affecting market stability, alongside regional economic updates and central bank policies.

Emerging markets stocks and currencies saw minor declines on Tuesday as investors awaited critical reform details from China and speculated about the implications of a potential second term for Donald Trump. MSCI's index tracking developing economies' bourses dipped 0.2%.

The Shanghai stock index ended the day flat, while Hong Kong stocks recorded their second consecutive day of losses. Investors adopted a cautious stance as the Communist Party's 'Third Plenum' commenced, where key economic reforms are expected to be announced. Concerns also mounted regarding the impact on inflation and trade for developing economies should Trump return to the U.S. presidency.

According to Piotr Matys, senior FX analyst at In Touch Capital Markets, another term for Trump could negatively affect export-oriented emerging markets, especially those heavily reliant on China. Trump's fiscal policies are expected to be inflationary, possibly constraining the Federal Reserve's maneuverability.

An index tracking emerging market currencies hovered near the flat mark, reflecting tepid trading over the past six weeks due to uncertainties around interest rate cuts. In Central and Eastern Europe, the Hungarian forint remained stable against the euro. Deputy Governor Barnabas Virag indicated that a minor reduction in Hungary's base rate is an "open question" for the central bank's policy meeting next week.

In Africa, South Africa's rand increased by 0.2% following a 1.4% decline in the previous session. A Reuters poll suggested that the central bank might cut rates by 25 basis points in September as inflation eases. Conversely, Kenya's shilling weakened by 0.3% against the euro, while the yield on 5-year sovereign bonds increased by 15 basis points.

Ratings agency S&P Global announced it would wait until Aug. 23 for a scheduled review to decide on potential changes to Kenya's sovereign credit rating. Amid a slow economic recovery, Thailand's cabinet approved a $2.8 billion soft loan scheme for commercial banks to lend at below-market rates. Consequently, the baht stayed flat against the dollar, while local equities lost 0.5%.

A stress test on banking systems in Zambia, Ghana, Rwanda, Morocco, and Mauritius indicated potential instability should nature loss impact the profits of agriculture and forestry firms. Rwanda's franc remained steady against the euro, coinciding with early election results favoring incumbent President Paul Kagame. Additionally, Syria's pound was stable ahead of expectedly uneventful parliamentary elections.

(With inputs from agencies.)