Stocks up in cautious trade with Powell in focus
Emerging market stocks made cautious gains on Friday, while currencies traded sideways in anticipation of a speech by Federal Reserve Chair Jerome Powell which will be closely watched for clues on the future path of U.S. monetary policy.
Hong Kong’s main index rose 1%, extending gains after a 3.6% surge on Thursday, following a report that Beijing is nearing a deal to let the United States inspect Chinese company records in Hong Kong.
MSCI’s index of emerging market shares rose 0.3%. Capping gains were declines in mainland China and Polish stocks, while Turkish, Hungarian and South African shares were flat.
The developing world currencies index was flat, as currencies made small moves against a steady dollar, with all eyes on Powell who is due to speak later in the day.
After 225 basis points of hikes to the main borrowing rate this year, and signs of the U.S. economy and inflation slowing, investors are trying bet between another 75 basis points increase or a 50 bps move from the Fed next month. Fed members have called for the bigger hike as inflation still remains above the central bank’s target rate.
“I don’t think (Powell) will come out more hawkish than before,” said Per Hammarlund, chief EM strategist at SEB. “If anything, he might indicate a somewhat lower end rate for the federal funds rate.”
“Given the strength of the U.S. dollar recently and given the weakness of the EM currencies in particular, I would expect there to be a short-lived upward tick or relief rally for EM currencies. But that’s pretty much mostly because expectations have been pretty high,” he said.
Higher interest rates in the United States support Treasury yields and the dollar, and have tended to divert flows away from high yielding but riskier emerging market assets. This has previously contributed to a handful of currency crises in emerging markets.
This time around, several EM central banks started their tightening cycle well ahead of the Fed. Asian central banks lagged broader peers, but have started tightening. Turkey remains an exception.
The lira, which is down 27% this year, is currently just about 1% away from record lows of 18.4 per dollar.
The South African rand fell 0.3% against the dollar. In central and eastern Europe, Hungary’s forint rose 0.7% against the euro, while most others were flat.
Meanwhile, in what could see billions of dollars of inflows to India, JPMorgan is sounding out big investors on adding India to its widely tracked emerging-market bond index, the Financial Times reported. The move could trigger $30 billion in inflows, Goldman Sachs estimates. For GRAPHIC on emerging market FX performance in 2022, see http://tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance in 2022, see https://tmsnrt.rs/2OusNdX
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