Currencies fall after Fed signals quicker tightening; Kazakh bonds slide further

  • EMFX index set for worst session since August
  • Kazakh 2045 bonds at April lows
  • EM stocks index at two-week lows
  • Rally in Alibaba, Meituan helps cap losses

Jan 6 (Reuters) - Emerging market stocks and currencies slid on Thursday after U.S. Federal Reserve minutes led investors to price in a sooner-than-expected start to interest rate hikes, while rising Omicron cases and a deepening crisis in Kazakhstan also weighed.

A tight U.S. labour market and rising inflation warrant faster tightening, Fed minutes revealed, prompting markets to expect an interest rate hike as soon as March. This sent U.S. Treasury yields and the dollar surging, while riskier assets weakened.

MSCI's index of developing market currencies (.MIEM00000CUS) was on course for its worst session since August, with most major Asian currencies trading 0.2% to 0.8% lower. Falling oil prices and the Kazakhstan crisis added to the Russian rouble's woes, sending the currency to a more than seven-month low.

Riskier currencies slide on the prospect of higher U.S. rates, which narrow interest rate differential and reduce their appeal for carry trade.

But analysts have said since Fed hikes come with sufficient warning, emerging market assets should be able to weather it better than the 2013 taper tantrum.

"Play-up of these risk factors alongside Omicron's rapid spread can exert downward pressure on risk assets... Nevertheless, with a hawkish Fed more or less priced, we see limited room for USD to extend gains," analysts at Maybank said in a note.

EMFX, stocks reaction to Fed minutes

Kazakhstan's 2045 dollar bond , which had its worst day since the peak of the COVID-19 panic in March 2020 on Wednesday, slid further, falling as much as 1 cent and nearing 20-month lows.

Russia sent in paratroopers as part of a peacekeeping force to quell protests that have been running for three days, with the largest city Almaty's international airport seized. Some Middle-East airlines and Lufthansa cancelled flights to the city. read more

Reuters Graphics

Emerging stocks (.MSCIEF) hit two-week lows with most major bourses in negative territory. But a rise in Hong Kong stocks (.HSI) towards market close driven by e-commerce majors Alibaba (9988.HK) and Meituan (3690.HK) saw the broader EM index move away from session lows and trade down 0.8%.

The Chinese property sector remained pressured with Guangzhou R&F Properties (2777.HK) bonds tanking after it said it did not have sufficient funds to buy back a $725 million bond.

Sri Lanka spreads widened on Wednesday but the central bank tweeted it had put aside money for a bond payment due on Jan. 18.

Turkey's lira slipped as much as 2.2% before cutting some of those losses. Simone Kaslowski, chairman of Turkey's leading TUSIAD business association, said on Wednesday the leap in annual inflation to 36.1% clearly showed the need to reconsider the policy steps Turkey has taken. read more

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Reporting by Susan Mathew in Bengaluru; Editing by Subhranshu Sahu

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