March 12 (Reuters) – Emerging markets currencies and stocks looked to end a volatile week on a sour note on Friday, with a dollar on the rise dousing risk appetite.
MSCI’s index of EM stocks fell 0.4% as a pick-up in U.S. bond yields pressured risk assets. Gains during Asian hours were erased with a 2.2% drop in Hong Kong shares leading declines.
On the week, however, the EM index was up about 1%, recovering after a brief fall into correction territory, as U.S. Treasury yields had pulled back after tepid U.S. inflation data. But it was well short of the rally seen in world stocks , which are up 2.6% so far.
“The stabilisation of U.S. Treasury yields… has brought some relief to EM asset markets, even though concerns about the trajectory of UST yields and the recent outflows continue to dominate market sentiment,” said Christian Keller at Barclays.
“We believe that the market backdrop is still conducive to risk-taking in EM, with the rise in oil and commodity prices a supportive factor.”
Barclays, citing Emerging Portfolio Fund Research data, also noted that the yields play had spurred “sizeable outflows” at both EM hard and local-currency bond funds in the week to March 10. However, these were more than offset by continued inflows into emerging equity funds, led by Asian stocks.
Investors’ focus next week is likely to be on a U.S. Federal Reserve policy meeting, and the first high-level talks between Beijing and Washington since U.S. President Joe Biden took office. Frayed relations between the two economies had roiled markets and contributed to a downturn in global economic growth.
Currencies of the developing world fell 0.1% as spiking yields saw the dollar inch back towards this year’s high.
Turkey’s lira, South Africa’s rand and Mexico’s peso all fell more than 1%, with the lira also under pressure from Thursday’s data showing dollarization among locals remains high ahead of a key central bank meeting next Thursday.
Unlike the rand and the peso, which are on track for weekly gains of more than 2%, the lira has struggled to make any headway since last Friday.
Expectations for both inflation and an interest rate rise ticked higher in a closely watched survey published on Friday, reinforcing market predictions that the central bank will tighten policy by about 50 basis points next week.
Russia’s rouble slipped from a three-week peak as oil prices fell, though the drop was less pronounced than elsewhere.
Reporting by Susan Mathew in Bengaluru; Editing by Subhranshu Sahu