Emerging equities fell 1 percent on Friday and several currencies were set to end the week on a sour note, hit by jitters over a looming U.S. interest rate rise and stalling commodity prices. MSCI’s emerging equity benchmark is on track for its steepest weekly loss since mid November, snapping a five-week winning streak. Bourses in Turkey, Russia and South Africa all fell around half a percentage point.
Heavyweight Korea dropped 1.2 percent and hit a two-week low amid reports that China had ordered tour operators to stop selling trips to the country amid rising tensions about the deployment of a U.S. missile-defence system.
On currencies, Russia’s rouble, South Africa’s rand and Turkey’s lira all firmed slightly as the dollar retreated from seven-week highs. They were heading for weekly losses, however, before a speech by U.S. Federal Reserve chair Janet Yellen. “The EM rally has hit a bit of a speed bump,” said Kiran Kowshik, emerging markets strategist at UniCredit. “The market is moving to price in a hike in March following the recent comments from Fed officials, that’s driving a retreat in some emerging market currencies.”
Waning commodity price strength and uncertainty over U.S. President Donald Trump’s policies are also having an impact, he added. In Turkey, the lira could be vulnerable after annual inflation data came in higher than expected, hitting double-digit levels and upping the pressure on the central bank.
More broadly, crude and copper prices both weakened over the week. As a number of Fed officials highlighted the need for higher interest rates, the implied probability of a March rate hike has risen to 74 percent from just 30 percent at the start of the week. However, a batch of data from some big emerging markets pointed to solid economic growth. Activity in the Chinese and Russian services sector continued to expand in February while South Africa’s private sector remained in growth for a sixth straight month.
For many investors, the signs of a growth turnaround are offsetting the possible fallout of Trump threatening to impose protectionist tariffs on emerging economies.
“Trump cannot upset what is driving emerging markets at this point in time that is, a cyclical global growth upturn which is evidenced when you look at global trade,” Fabiana Fedeli, senior portfolio manager at Robeco in Rotterdam, said.