Emerging market shares fell in holiday-thinned trading on Tuesday amid caution ahead of a US Federal Reserve meeting this week as investors brace for yet another rate rise and look for clues on the pace and size of future hikes.
Several emerging markets, including mainland China, Malaysia, India, Russia and Turkey among others, were closed on Tuesday for Ramadan and other local holidays.
MSCI’s index of emerging market shares fell 0.4% with stocks in South Korea and Taiwan down 0.3% and 0.6% respectively, while South African shares were also trading lower, snapping a three-session winning streak.
In Hong Kong, lender HSBC Holdings rose 2.3% after its largest shareholder urged a break-up of the bank to improve returns, while e-commerce giant Alibaba slipped 1.4%.
Hong Kong is also set to ease Covid-19 curbs this week.
The broader emerging market index had marked its fourth straight month in the red, with April’s 5.7% slide being its worst month since July last year, as investors worried about the fallout from the Ukraine war, Covid restrictions in China, and the impact of monetary policy tightening by the Fed.
“This is a particularly tough time for emerging markets, where $50 billion of portfolio capital has left bond and equity markets since late February,” ING said in a note.
On Wednesday, investors expect the Fed to raise rates by 50 basis points, and are pricing in an aggressive run of rate hikes as it tries to tame soaring inflation.
Higher US borrowing costs hit riskier currencies as they reduce the benefit from interest rate differentials that increases riskier currencies’ appeal for carry trade.
“We see the next six to 12 months as particularly challenging for emerging market currencies, where the Brazilian real and the South African rand are probably the most vulnerable,” ING said.
The rand firmed 0.9% on Tuesday, but hovered near its lowest since December, while central and eastern European currencies edged lower against the euro.
While many emerging market central banks have embarked on policy tightening cycles already to combat inflation, the outlook for some currencies such as Turkey’s lira is grim as politically pressured interest rate cuts have roiled the currency.
Capital controls have helped stem declines in Russian assets, but the outlook remains bleak with the European Union preparing sanctions on Russian oil sales that could deprive Moscow of a large revenue stream within days.
Russia’s offshore rouble was trading at around 70 to the dollar, while Russian dollar bonds stabilised after a sharp fall on Monday.
The offshore yuan hit November 2020 lows as Covid-19 lockdowns weighed on the outlook for economic growth in China.