EM-rate hike jitters slam assets; rand logs worst week in 2 years

Investors shed riskier emerging market stocks and currencies on Friday following the US Federal Reserve’s aggressive view on interest rate hike next month, while South Africa’s rand marked its biggest weekly fall in two years.

The MSCI’s gauge for emerging market stocks lost 0.7% and was headed for its largest weekly decline in six, while its currencies counterpart was on track for its worst weekly performance in seven.

US Treasury yields and the dollar rose after Fed Chair Jerome Powell said on Thursday a half-point interest rate increase “will be on the table” when the central bank meets on May 3-4 to approve what are expected to be a series of rate increases this year.

Rising rates in developed markets come against the backdrop of red-hot global inflation, and as emerging market central banks reach a mature stage in their monetary tightening cycles.

Central banks in Brazil, Colombia and South Africa were among many that have consistently raised rates since last year, supporting their currencies.

“We’re finally seeing the pressure of higher US rates play out in the EM FX space,” said Simon Harvey, head of FX analysis at Monex Europe and Monex Canada.

“EM investors should position themselves cautiously amid the current backdrop of higher US rates and substantial global growth risks, especially in currencies that no longer show good value.”

In South Africa, the rand fell for a fifth straight session, last down 1.3% at R15.67 against the dollar. The currency touched its weakest point on Friday since late January, clocking a weekly fall of 6.3%.

The crisis at state power utility Eskom and floods in KwaZulu-Natal province that caused at least R10 billion of infrastructure damage have reminded investors that Africa’s most industrialised economy faces significant constraints.

Russia’s rouble  firmed past 74 against the dollar in Moscow trade as companies prepared to pay large sums in taxes.

Turkey’s lira dropped 0.2%, while most eastern and central European emerging market currencies found support against a weakening euro.