Emerging market stocks and currencies fell on Thursday after minutes of the Federal Reserve’s last meeting signaled more U.S. interest rate hikes, while investors in Turkey’s lira awaited a central bank policy decision.
MSCI’s index of emerging market stocks fell 0.6%, set for their worst session in two weeks, while its currencies counterpart was on course for its steepest one-day fall in two months as the dollar got a small boost from the Fed minutes.
After two 75 basis point rate hikes this year, the Fed tempered expectations for another large increase in September, but members saw the need to keep cooling inflation, the minutes showed. Traders now see a slightly higher chance of a 50 bps hike next month.
“We maintain our expectations for another 100bps in hikes (by the Fed) by year-end, with risks to the upside if inflation does not slow in line with our forecasts,” said Mark Haefele, chief investment officer, UBS Global Wealth Management.
High U.S. borrowing costs increase the appeal of the dollar and U.S. bonds, and tend to divert capital flows from riskier assets. This has led to several currency crises in emerging markets in the past.
Some gains in central and eastern European shares helped cap losses in the broader emerging markets index, with Hungarian shares recovering 0.2% after declining 1.3% on Wednesday on worries about a slowdown in economic growth.
CENTRAL BANKS STRIVE
In Egypt, government bonds extended declines set-off by the abrupt resignation central bank chief Tarek Amer on Wednesday.
The Egyptian pound is down about 18% this year. On Thursday, the central bank is seen hiking rates by 50 bps to 11.75%.
But Capital Economics says the next governor may have to let the currency fall further to 25 per dollar by end-2024 from around 19 currently.
Turkey’s struggling lira held steady, just inches away from December record lows. The country’s central bank is seen holding the key interest rate at 14% despite inflation surging to nearly 80%.
The Philippine peso was a rare gainer among emerging market currencies on Thursday, up 0.2% after the central bank hiked by 50 bps to 3.75%, as expected, and left the door open for more.
Meanwhile, ratings agency Fitch on Wednesday upgraded Ukraine’s rating to ‘CC’ from ‘Restricted Default’ following the country’s restructuring of external debt last week.
For GRAPHIC on emerging market FX performance in 2022, see http://tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance in 2022, see https://tmsnrt.rs/2OusNdX
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(Reporting by Susan Mathew in Bengaluru; Editing by Mark Potter)