Emerging Markets – Currencies, Stocks Selling As Investors Prepare To Tighten

Emerging Markets - The Real Losses for Brazil in Latin America

Written by Susan Mathew and Ankika Biswas

Sept 1 (Reuters) – Emerging market currencies slid towards two-year lows on Thursday as recession fears escalated as the European Central Bank and the U.S. Federal Reserve expected to tighten monetary policy aggressively this month.

Weak PMIs from Asia and Europe reinforced concerns about an economic slowdown, while the continued focus of major central banks on controlling inflation further deepened fears that they may remain tolerant of some weakness in growth.

The European Central Bank and Federal Reserve are expected to rise by 75 basis points this month, in what would be the third increase of that size by the Fed this year.

China’s yuan remained close to two-year lows, while South Korea’s record trade deficit sent the won down 0.9% to its lowest level in a decade. The South African rand hit a six-week low, while the Turkish lira fell to 0.7 percent before recovering.

“It’s a challenging environment for emerging markets,” said Jacob Christensen, senior analyst and head of emerging markets research at Danske Bank.

“This morning’s PMIs are forcing this signal that the global manufacturing sector is in decline, and the Federal Reserve actually reinforced its anti-inflation narrative at Jackson Hole last Friday, which has fueled stock markets’ fears and global risk sentiment.”

Shares were also sold off, with the MSCI Emerging Markets Index dropping 1.7% to its lowest level in more than a month. Asian stocks were set for their worst session in nearly eight weeks, with South Korea’s KOPSI index down 2.3%.

Shares in South Africa and Turkey lost more than 1% while Polish stocks shed nearly 2%.

In Turkey, where inflation has already reached 80%, the government has raised electricity and gas prices. The increases are expected to push inflation in Turkey up by 0.8 percentage points, according to Reuters calculations.

Asking the government to focus on economic growth, Christensen said raising rates could lead the central bank to keep its key interest rate unchanged at the next meeting, after cutting it by 100 basis points to 13% this month.

IMF relief

Sri Lanka on Thursday reached a preliminary agreement with the International Monetary Fund for a loan of about $2.9 billion, while Zambia got approval from the International Monetary Fund for a loan program of $1.3 billion for a period of 38 months.

Sri Lankan stocks jumped 2%, and July 2026 dollar bonds rose, as did Zambia’s July 2027 issuance.

“The difficult issue is of course questioning debt sustainability, and in many of these places, China has made a significant portion of the loans that complicate potential debt restructuring,” Christensen said.

For a GRAPHIC on the performance of emerging market FX in 2022, see http://tmsnrt.rs/2egbfVh For a GRAPHIC on the performance of the MSCI Emerging Index in 2022, see https://tmsnrt.rs/2OusNdX

For the most important news across emerging markets

For the Central Europe market report, see

For the Turkish market report, see

For a Russian market report see (Susan Mathew Bengaluru Report; Editing by Barbara Lewis)

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