Emerging market shares rise on tempered US Fed expectations

‘Markets are interpreting (the) Fed meeting as more conservative than previously expected’ – Simon Harvey.
Image: AdobeStock

Emerging market stocks broke a three-session losing streak on Thursday after the US Federal Reserve struck a less aggressive tone than expected on monetary policy, while investors focused on central bank decisions in Poland and the Czech Republic.

MSCI’s index of emerging market shares was up 0.3%, with some strong gains in India as it made up for a slide on Wednesday, while MSCI’s eastern Europe equity index rose 0.4%.

In a week dotted by central bank moves, the broader index of emerging market shares was set to close about 0.8% lower.

After a surprise interest rate hike by India, and an expected 100 basis points hike in Brazil, markets expect a move by the same magnitude in Poland, while the Czech rate is seen hiked by 50 bps.

Against a weaker euro, the Polish zloty jumped over 1%, while the Czech crown was flat.

Central banks of the United Arab Emirates, Kuwait and Bahrain also raised their key rates on Wednesday as inflation surged.

The moves come as the Fed hiked its key borrowing rate by an expected half-point on Wednesday. But Chair Jerome Powell explicitly ruled out a 75 bps raise in a coming meeting, spurring some risk appetite.

“Markets are interpreting (the) Fed meeting as more conservative than previously expected,” said Simon Harvey, Head of FX Analysis at Monex Europe.

“We expect the softer dollar to persist through to the end of the week.”

But sentiment this week has remained pressured amid uncertainty around the Fed move, Europe’s sanctions on Russian oil which has further fuelled inflation worries and worries about demand from China as it brings back some Covid curbs.

Data on Thursday showed China’s services sector activity contracted at the second-steepest rate on record in April due to the curbs.

Turkey’s lira dropped 0.7% as data showed annual inflation hit a 20-year high of nearly 70%, coming in above forecast, as the war in Ukraine exacerbated energy import prices which were compounded by a crash in the lira last year.

South Africa’s rand lost 1.3% with data showing private sector activity expanded at a slower rate in April as power cuts and floods in KwaZulu-Natal province weighed on output and new orders.

A Reuters poll found short positions on the Chinese yuan touched their highest on record and bearish bets on other Asian currencies surged. A separate poll showed the Hungarian forint and Polish zloty will gain ground over the next year should war and geopolitical disputes fade.

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