EM-Stocks flat on China’s stimulus response, SA rand at one-month low

After severe power cuts and as inflation in March came in just below expectations.
Image: Waldo Swiegers / Bloomberg

Emerging market stocks were flat on Wednesday on China’s wary response to Covid-19 stimulus, while South Africa’s rand hit its lowest in one month after severe power cuts and as inflation in March came in just below expectations.

Developing markets in Asia, especially those in China and Hong Kong, fell after China’s central bank unexpectedly kept its benchmark lending rates unchanged. The MSCI’s index for EM equities was flat by 0858 GMT.

The move was seen as a lacklustre reaction by the central bank despite frequent government pledges to support a slowing economy hit by the worst Covid-19 outbreak in two years.

Emerging market currencies were also pressured by a strengthening dollar, with the MSCI’s index for EM currencies falling 0.2%.

South Africa’s rand fell 0.7% to R15 against the dollar, its lowest level since mid-March. The currency extended declines to the third day as a ramp up in scheduled power cuts by state utility Eskom and floods sparked fears of economic constraints in Africa’s most industrialised nation.

Data showed consumer inflation rose to 5.9% year on year in March, slightly less than the 6.0% that analysts had forecast and within the South African Reserve Bank’s (SARB) 3%-6% target range.

Economies around the world are battling red-hot inflation against the backdrop of rising commodity prices and the Ukraine war, with Turkey and Russia among those facing the highest inflationary pressures.

Turkey’s lira edged 0.2% lower against the dollar, while the onshore rate on the Russian rouble firmed.

Central banks in both economies have introduced a series of measures to contain any real damage to their.

More recently, Turkey’s Central Bank reduced to zero the interest rate applied to lira-denominated required reserves and ended the practice of making additional interest payments on sums converted from foreign currency to lira by real persons.

Even as the measures by the Turkish central bank fall into the category of soft capital controls, they are of no help to the exchange rate, says Tatha Ghose, FX and EM analyst at Commerzbank.

“This is both because CBT’s FX reserves are not sizeable enough to allow for significant FX intervention… and because it is just a transfer of FX from other banks’ balance sheets to CBT – such re-allocation has few macroeconomic implications.”

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