Emerging markets set for February decline as rate hike fears dampen mood

By ReutersEmerging market stocks edged lower on Tuesday, on track for their biggest February percentage decline in over two decades, as geopolitical risks and fears about US interest rates staying higher for longer cooled demand for riskier assets.

The MSCI EM equities index slipped 0.5 per cent and was down 6.6% this month, headed for its worst February performance since 2001.

A rally in EM stocks at the beginning of 2023 has petered out in recent weeks after signs of strength in the U.S economy fueled fears of aggressive rate hikes by the Federal Reserve and geopolitical risks including heightened U.S.-China tensions also weighed on sentiment.

“It’s started to get more challenging for emerging markets,” said William Jackson, chief emerging markets economist at Capital Economics.

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“We think weakness in the global economy will lead to more risk-off in the next few quarters, providing a difficult backdrop.”
Data on Tuesday showed China’s urban employment fell for the first time in six decades last year and per capita spending also marked a rare decline, as harsh COVID-19 curbs ravaged the world’s second-biggest economy.

Stocks in China rose 0.6% while Hong Kong’s Hang Seng index .HSI closed down 0.8 per cent.

Regional currencies were muted against a stronger dollar and are set to record their worst month since September 2022.
The South African rand was down 0.2% ahead of the release of domestic money supply, budget, trade and unemployment data later in the day.

Russia’s rouble was stronger against the US dollar at 74.39. Local media reported that Russia’s oil output was back at pre-sactions levels for the first time in February.

Turkey’s lira was flat at 18.8860 after data showed the country’s economy expanded 5.6 per cent in 2022, more than expected with growth slowing to 3.5% in the fourth quarter as a decline in demand continued.

In central and eastern Europe, Hungary’s forint edged lower against the euro ahead of an interest rate decision by the country’s central bank due later in the day.

The National Bank of Hungary is widely expected to keep its base rate steady at 13 per cent.

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Elsewhere in emerging markets, India’s GDP growth likely slowed further in the October-December quarter amid weakening demand and is set to lose more momentum as a series of interest rate hikes weigh on activity, according to a Reuters poll.