On Thursday, the index for emerging-market stocks fell into correction territory, following an extended sell-off caused by uncertainties surrounding U.S. policies and the growth outlook for China.

The MSCI EM stock index dropped by 0.4%, reflecting a total decline of 10% since its peak on October 2, thus officially indicating a correction. The decline was heavily influenced by Samsung Electronics Co Ltd and Taiwan Semiconductor Manufacturing Co, as new semiconductor trade restrictions announced by the Biden administration are expected to extend to nearly all global markets. Learn more about these restrictions here.

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The index, which significantly includes Chinese stocks, has suffered considerable declines due to poor performance in shares from China’s economy, especially after the government’s stimulus measures failed to meet trader expectations.

A related index that tracks developing currencies decreased for the second day in a row as the dollar strengthened.

Since early October, assets in the developing world have seen a notable decline. Even with the Federal Reserve moving towards monetary easing, inflation figures have stayed high during October and November, leading traders to forecast fewer and smaller rate cuts in upcoming meetings.

For more insights, check out: Trade war fears affect rand, triggering largest drop since June

The election of Donald Trump and the Republican Party has heightened inflation expectations, consequently increasing yields on 10-year U.S. Treasury bonds.

As Trump’s inauguration on January 20 nears, traders are becoming more cautious, with anticipated tariffs sparking significant market volatility earlier this week.

“There’s too much uncertainty about Trump’s plans to form any strong convictions on risk assets in either direction,” remarked Henrik Gullberg, a macro strategist at Coex Partners.

“Market conditions will likely remain volatile as the inauguration approaches, responding to Trump’s tweets and public statements.”

Frustration surrounding China’s stimulus measures and the tepid start of Chinese equity markets this year have further weakened investor confidence. While Chinese tech shares haven’t fluctuated much throughout the day, they are on track for their largest weekly decline in seven weeks.

Additionally, Chinese markets are grappling with economic indicators suggesting sluggish growth, with inflation falling for the fourth straight month.

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As per Greg Lesko, managing director at Deltec Asset Management LLC in New York, stocks from Brazil and South Korea have contributed to the decline of the MSCI index, with worries over fiscal policies in Brazil and the impeachment and arrest of South Korean President Yoon Suk Yeol significantly impacting those markets.

“I expect the market to remain cautious until there is greater clarity on policies, which should become clearer soon… There are many enticing stocks out there, so we foresee promising opportunities, although some patience will be required,” Lesko said.

Goldman Sachs strategists have revised their projections for EM equities returns for 2025, cutting their year-end target for the index from 1200 points to 1190 points.

Nonetheless, this adjustment still suggests an increase from Thursday’s closing figure of 1066 points, as Goldman predicts modest returns mainly fueled by earnings growth.

They have expressed overweight positions in markets like China, South Africa, and Saudi Arabia, while also improving their outlook on Turkish equities.

Declining Rand

The MSCI’s EM index faced difficulties due to weakening values of the Chilean peso, Mexican peso, and South African rand.

In the bond markets, high-yield dollar-denominated debt performed well, especially sovereign bonds from Bahrain, Gabon, and Lebanon. The bond market concluded at 2 PM New York time in observance of a national day of mourning for former President Jimmy Carter.

Poland commenced the issuance of €3 billion in bonds to meet financing needs, reflecting a broader trend of EM debt issuance this year as countries seek funding ahead of Trump’s inauguration.

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