EM-EM equities skid 1% on China slump, Moscow shares retreat

Emerging market shares fell 1% on Friday as a selloff in Chinese stocks dragged down Asian equities, while worries over the Ukraine war’s economic impact and signs of tightening monetary policy globally also weighed on sentiment.

China stocks, ended the day more than 1% lower as the technology sector slumped on US delisting risks for Chinese companies and hawkish comments from Federal Reserve officials.

Russia’s benchmark MOEX index dropped nearly 4% on its second day of trading after a nearly month-long suspension, with airline Aeroflot leading the losses.

MSCI’s index of EM stocks slumped 1%, but was on course to end the week slightly higher. Currencies firmed, with the rouble holding steady at 98.5 a dollar in offshore trading.

Western leaders meeting in Brussels on Thursday agreed to strengthen their forces in Eastern Europe and tighten sanctions on Russia as the war entered its second month.

“Investors are looking to diversify across EM stocks, and have begun shifting funds away from countries that are more exposed to the war,” said Piotr Matys, senior FX analyst at In Touch Capital Markets.

Overall, both EM stocks and currencies are set to end the week higher as gains in commodity-linked assets and moves to tame soaring prices offset the uncertainty and rising inflationary pressures from the Ukraine war.

JPMorgan analysts recommended investors sell EM local-currency bonds, slapping an “underweight” tag on them as the war accelerates inflation and underlines vulnerabilities across economies.

Mexico’s peso held near its strongest level since late September at 20.08 per dollar. President Andres Manuel Lopez Obrador let slip the central bank’s decision on Thursday to raise its benchmark interest rate by 50 basis points to 6.5%, a decision unexpectedly announced hours ahead of schedule in a breach of norms.

“That refuels speculation as to whether and how much influence the government wields over Banxico. The smallest suspicion of dependence is not a good sign for a currency. The peso was able to appreciate, but for that to remain the case, this faux pas shouldn’t be repeated,” Commerzbank wrote in a note.

South Africa’s rand held at a five-month high against the dollar and was on pace for a weekly gain of 2.8% after the central bank raised the repo rate.

Elsewhere, the International Monetary Fund on Friday will decide on Argentina’s $45 billion program, with the country anticipated to clear the final hurdle to rework its debt, sources said.

Countries “vulnerable” to debt shocks due to the war-driven inflation spike include Sri Lanka, Mongolia, Egypt, Pakistan and Angola, U.N. agency UNCTAD said on Thursday.