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Stocks, FX hit by hawkish Fed bets; Geopolitics in focus

Emerging market stocks slumped on Friday.
Emerging market stocks slumped on Friday.
Image: 123RF/LEON SWART

Emerging market stocks slumped on Friday as a sell-off on Wall Street overnight and worries about policy tightening by major central banks sapped risk appetite, while Russia's rouble made small moves ahead of talks with the US over Ukraine.

The U.S. Federal Reserve's policy stance will be the main sentiment driver next week with markets pricing in a faster pace of hikes to control inflation.

This pushed MSCI's index of EM currencies down 0.1%, while shares down 0.8%, and 0.9% on the week.

“We think quantitative tightening by the (Fed) will mean weaker emerging-market FX against the USD, but at a gradual pace. As a result, we expect EM central banks to tighten rates at their own pace rather than speed up,” EM strategists at BNP Paribas said in a note.

Wall Street indexes ended sharply lower on Thursday with Nasdaq in correction territory on disappointing earnings including Netflix. Nasdaq futures were still in the red on Friday.

While most emerging market central banks have adopted hawkish stances to curb inflation rise, China has eased monetary policy to spur economic growth. More easing may be coming on Friday, sources told Reuters.

Emerging market equity funds enjoyed their biggest inflows since March 2021 at $5.2 billion in the week to Wednesday, while China stocks raked in $3.5 billion, BofA's weekly flow show report showed.

Developing market debt funds suffered their biggest weekly outflows since October at $2.2 billion.

Top diplomats of Russia and the US are set to meet in Geneva on Friday to discuss soaring tensions over Ukraine after a flurry of meetings in the last week produced no breakthroughs.

The US predicts Moscow will make a move on Ukraine and has readied sanctions to be imposed in case of an invasion, as has the European Union.

Russia's rouble firmed 0.2%, but is down 2% since the start of the year, while Ukraine's hryvnia is down nearly 4% since start of the year.

Bonds have borne the brunt of the pressure with both Ukraine and Russia hard currency bonds racking up negative returns of more than 7% year-to-date on the JP Morgan EM bonds index.

The rand rose 0.2%, inching closer to Thursday's over two-month highs, as rising inflation data this week increased bets that the central bank will hike interest rates next week.

Turkey's troubled lira which got a brief boost on Thursday from the central bank keeping the key rate unchanged after a series of cuts, was down 0.4% on Thursday.

 

Reuters

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