Inflation, growth woes haunt emerging stocks, currencies

Emerging market stocks suffered their worst day in over three months on Monday and developing currencies slipped as a COVID warning from China added to fears over rising global inflation ahead of a U.S. Federal Reserve meeting later in the week.

MSCI’s index for emerging market equities fell 3.1% by 1138 GMT while the emerging currency benchmark slipped 0.6% – both at their lowest level in around three weeks.

The declines mirrored sharp declines in global markets more widely after data on Friday showed U.S. inflation was running red-hot, fuelling worries about even more aggressive policy tightening in a big week for central banks.

“There is an extreme fear in markets about two factors – inflation and slowing global growth,” said Cristian Maggio, head of portfolio strategy at TD Securities in London.

Authorities in China’s capital Beijing on Monday raced to contain a COVID-19 outbreak traced to a 24-hour bar known for cheap liquor and big crowds, with millions facing mandatory testing and thousands under targeted lockdowns.

Maggio said Beijing’s zero-COVID policy had rekindled concerns over the hit to China’s economic growth. Meanwhile an inversion of the U.S. yield curve – a move that often heralds economic recession – added to frayed nerves.

“Two of the world’s biggest economies slowing down simultaneously and perhaps even falling to a recession, then there is only one way assets can go – which is lower.”

The Fed is now expected to lift its lending rate by at least half a percentage point at the end of its two-day meeting on Wednesday.

The stronger dollar ramped up the pressure on many emerging currencies, with South Africa’s rand down 1.4% to its lowest in nearly one month.

India’s rupee hit a record low of 78.28 per dollar, while bond yields spiked to their highest levels in more than three years.

Turkey’s lira fell to 17.27 per dollar in early trading, while the country’s sovereign dollar-denominated bonds issued by Turkey fell while the cost of insuring exposure to its debt rose as wider market woes added to concerns over the country’s soaring inflation and sliding currency.

More widely, the premium demanded by investors to hold emerging market hard-currency bonds over safe-haven U.S. Treasuries rose to 473 basis points – the widest in almost three weeks.