Cautious Fed casts a pall on EM assets, key China rate call awaited

Emerging-market assets fell on Thursday as the US Federal Reserve cut interest rates but signalled a holding pattern for future, while Chinese stocks outperformed on rising bets that Beijing will lower a key domestic lending rate to boost growth.

MSCI’s indexes of developing world stocks and currencies were both lower after Fed Chairman Jerome Powell took a more guarded approach to any further reductions in borrowing costs.

Forecasts from all 17 Fed policymakers showed a broader disagreement, with seven expecting a third rate cut this year, five seeing the current cut as the last for 2019, and five appeared to have been against even the latest move to lower rates.

“The dot plot tells us that the overall committee is not committed to further easing, so that’s slightly more hawkish than (what) the market was expecting,” said Graham Stock, EM senior sovereign strategist at Blue Bay Asset Management.

Emerging markets have benefited this year as major central banks moved to ease monetary policies in the wake of a bruising trade war between the United States and China that has put the world economy at the risk of a recession.

“The Fed and a lot of other central banks are going to be increasingly data-dependent but are not going to be shy of cutting if the domestic inflation outlook suggests that there is room.”

Stock indexes were mostly lower but mainland China shares ended higher, ahead of a key domestic lending rate decision that could offer more clues on Beijing’s easing policy.

Among currencies, the Turkish lira led losses, down 0.4%, while the South Korean won shed 0.2% after a Bank of Korea board member signalled the possibility of further rate cuts despite interest rates approaching record lows.

Focus was also on the South African rand, which edged higher ahead of a central bank monetary policy decision later in the day where economists expect it to keep the key rate unchanged.

Analysts have warned that rate cuts by the South African Reserve Bank won’t necessarily change the face of a structurally hamstrung economy but may help soften the blow.