Hawkish Fed hammers emerging stocks; currencies outside Asia rise

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  • Markets start to price in more than four Fed hikes this year
  • China's yuan slides 0.7%; Alibaba slides 7%
  • Russian rouble firms after breaching 80 a dollar on Wed
  • S.Africa cenbank seen hiking by 25 bps at 1300 GMT

Jan 27 (Reuters) - Emerging market stocks slumped to over 14-month lows on Thursday and currencies were set for the worst session in more than five months, after the U.S. Federal Reserve signalled a March hike in interest rates and sustained policy tightening.

Subsequent interest rate increases and an eventual reduction in the Fed's asset holdings would follow as needed, Fed Chair Jerome Powell said. read more

The comments spurred bets about more Fed tightening than speculated. Nomura now expects a 50-basis-points hike in March, as opposed to 25 bps markets had priced in, and along with BNP Paribas and BofA, now sees more than four hikes this year. read more

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As U.S. Treasury yields hit 23-month highs and the dollar surged, most Asian currencies (.MIEM00000CUS) slumped, with the Chinese yuan sliding 0.7% for its steepest fall since June.

But currencies elsewhere in the developing world fared better.

For bond markets, the Fed's balance sheet reduction is eyed, said Kiti Pantskhava, deputy head of research and fixed income at BCS Global Markets.

"Signs are coming from the Fed that they will stop asset purchase and begin to reduce the balance sheet. That's potentially a bit more painful for EM. That will more likely affect long term U.S. Treasury yields and longer-term paper all over the world."

Russia's rouble gave up early losses to trade 1.2% higher. It was last at 78.5 per dollar after breaching 80 on Wednesday. Ukraine's hryvnia hit fresh four-year lows and was last trading down 0.2%.

The United States had set out a diplomatic path to address sweeping Russian demands in eastern Europe, Washington said, as Moscow held security talks with Western countries and intensified its military build-up near Ukraine with new drills. read more

South Africa's rand rose 0.6% ahead of a central bank meeting later in the day when investors expect a 25 basis points hike to 4% in the key interest rate as inflation rises.

As the dollar rally pressured the euro, the Czech crown rallied 0.4% against the euro.

Turkey's lira fell 0.1% after the central bank hiked its year-end annual inflation forecast to 23.2%, from 11.8% three months ago.

The EM stocks gauge (.MSCIEF) dropped 1.6%, as China property and technology majors slid with Alibaba (9988.HK) down 7.2%.

China Evergrande Group (3333.HK) slumped after the developer's thinly detailed roadmap for restructuring left investors dissatisfied. A report on Thursday said Beijing was weighing breaking up Evergrande.

The broader EM stocks index is down about 4.2% so far this week, set for its worst weekly performance since August.

For GRAPHIC on emerging market FX performance in 2021, see http://tmsnrt.rs/2egbfVh

For GRAPHIC on MSCI emerging index performance in 2021, see https://tmsnrt.rs/2OusNdX

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Reporting by Susan Mathew in Bengaluru; Editing by Shailesh Kuber

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