EM-Roughed up EM stocks set for fourth weekly fall on inflation, Ukraine

A gauge for emerging market stocks tracked their fourth weekly decline on Friday after recent US inflation data firmed bets of tighter monetary policy globally, as Russia’s attack on Ukraine raged on with no real sign of abating.

The MSCI’s index for emerging market stocks fell over 1% on the day, adding up to declines of 4.8% this week, while its currencies counterpart was set for its third straight weekly fall.

Tensions in Ukraine has put the risk appeal of emerging markets under pressure amid fears of imminent monetary tightening cycles from the developed world to contain global inflationary pressures.

A reading on Thursday showed US inflation hitting a four-decade high, further solidifying bets that the Federal Reserve will raise its benchmark lending rate at the end of its policy meeting next week, and pushing the dollar to a new five-year high against the Japanese yen.

The European Central Bank also surprised with a hawkish tone on Thursday, signalling a tapering of the pandemic-era stimulus that had helped flows into riskier assets.

The Turkish lira weakened 1%, languishing at lows it last hit in December, while South Africa’s rand slipped 0.2%. The rand was, however, among few emerging market currencies headed for a weekly gain owning to its exposure to gold prices.

Western sanctions on Russia have spurred a recent rally in commodity prices, which has benefited some emerging market exporters of oil, gold and other raw materials, but hurt importers and economies of countries with close proximity to both Ukraine and Russia.

Diplomatic talks between Russian and Ukrainian foreign ministers on Thursday showed little to no progress, with the Group of Seven nations and the European Union now moving to revoke Russia’s “most favoured nation” status.

This would allow the United States and its allies to put tariffs on a wider range of Russian made goods.

“Despite ‘know-nothing, buy-anything’ market expectations that peace talks would prompt a rapid end to this war … we are no nearer to that happening. Russia is still insisting Ukraine surrender or be flattened: so far, it won’t,” said Michael Every, global strategist at Rabobank.

Russia’s rouble traded higher in both onshore and offshore markets, with local stock markets largely shut by order of the central bank, which limited trading in stocks and bonds after the West rolled out economic sanctions against Russia.

Separately, research from Bank of America showed emerging market debt saw its biggest outflows in two years.