Emerging market stocks back off from six-month highs

Emerging market stocks hit six-month highs on Wednesday but came off session peaks on caution ahead of U.S. inflation data this week which could sway the Federal Reserve’s policy tightening plans.

Developing world currencies, meanwhile, edged up against a steady dollar, hitting seven-month highs and on course to mark their thirteenth straight session of gains.

The EM currencies index has added almost 8% since 2022 lows hit in October, helped by China’s policy support measures and a broad easing of its COVID-19 curbs as well as tempered interest rate hikes by the Fed.

MSCI’s index of emerging market stocks rose 0.2% and was on course to mark its seventh straight day in the black, the longest positive run since November 2021.

Most major indexes in Asia fell, but gains in heavyweights such as Tencent, Alibaba, Baidu as well as in central Europe and South Africa buoyed the broader EM benchmark.

All eyes are on U.S. inflation which is seen having cooled further in December. The data is due on Thursday.

Fed officials this week signalled that the data will help them decide whether they can slow the pace of interest rate hikes, after hiking by more than 400 basis points last year.

“Business surveys point to a slowing U.S. economy and, if inflation allows, the Fed will be in a position to ease policy later this year,” said Chris Turner, global head of markets and regional head of research for UK and CEE at ING.

“Commodity markets remain bid on the China rebound story and we expect emerging and commodity FX to remain bid.”

But the World Bank on Tuesday warned that fragile economic conditions could be especially hard on emerging market economies.

China’s yuan rose 0.1% after breaking a rally on Tuesday. China’s central bank ramped up a liquidity injection on Wednesday, offering fresh funds to the banking system.

The rand was steady.

State power utility Eskom said on Tuesday it will implement “Stage 6” rotational power cuts every night as it struggles with its coal-fired power generating units.

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Turkey’s lira, which has seen investor interest depreciate over the last year thanks to its unconventional monetary policy, was flat. Data on Wednesday showed Turkey’s current account deficit in November widened to $3.666 billion, less than a Reuters forecast.

Russia’s rouble edged up. A report showed the country’s oil production and exports rose in early January.