Currencies fall after the Fed signals faster tightening; Kazakh bonds slide further

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Shares and currencies in emerging markets weakened on Thursday after US Federal Reserve minutes pushed investors to price earlier than expected interest rate hikes, while growing Omicron cases and a deepening crisis in Kazakhstan also carried weight .

Tight U.S. labor markets and rising inflation call for faster tightening, Fed minutes reveal, prompting markets to expect interest rates to rise as early as March. This led to an increase in US Treasury yields and a rise in the dollar, while riskier assets weakened.

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The MSCI Emerging Market Currency Index was on track for its worst session since August, with most major Asian currencies trading 0.2% to 0.8% lower. Falling oil prices and the Kazakh crisis have contributed to the problems of the Russian ruble, bringing the currency to its lowest level in more than seven months.

Risky currencies slide into the prospect of higher U.S. rates, which narrow interest rate differentials and reduce their attractiveness to carry trade.

But analysts say that since Fed increases come with enough warnings, emerging market funds should be able to withstand it better than the 2013 outrage.

“Combining these risk factors together with the rapid expansion of Omicron may put pressure on reducing risky assets … However, given the more or less Fed prices, we see limited room for the dollar to prolong gains,” Maybanka analysts said in a note.

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Kazakhstan’s $ 2,045 bond, which had its worst day since the peak of panic over COVID-19 in March 2020 on Wednesday, slipped further, falling as much as 1 cent and approaching its 20-month low.

Russia has sent paratroopers as part of the peacekeeping force to quell protests that have been going on for three days, and the international airport in the largest city of Almaty is occupied. Some Middle Eastern airlines and Lufthansa have canceled flights to the city.

Emerging stocks hit two-week lows, and most major stock exchanges are in negative territory. But Hong Kong stock growth toward market closure spurred by large e-commerce stores Alibaba and Meituan led the broader EM index to move away from its session lows and trade by 0.8%.

China’s real estate sector has remained under pressure due to the fall of Guangzhou R&F Properties bonds after it said it did not have enough funds to buy back a $ 725 million bond.

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Spreads in Sri Lanka widened on Wednesday, but the central bank said it had set aside money to pay for bonds by January 18th.

The Turkish lira fell as much as 2.2% before reducing some of those losses. Simone Kaslowski, president of Turkey’s leading business association TUSIAD, said on Wednesday that the jump in annual inflation to 36.1% clearly shows the need to reconsider the political steps Turkey has taken. For a GRAPH on the performance of the FX emerging market in 2021, see http://tmsnrt.rs/2egbfVh For a GRAPH on the performance of the emerging MSCI index in 2021, see https://tmsnrt.rs/2OusNdX

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(Reporting by Susan Mathew in Bengaluru; Editing by Subhranshu Sahu)