Emerging stocks retreated yesterday, taking their cue from Wall Street losses amid rising US and German bond yields and expectations that the Fed and ECB will soon cut back on stimulus.
European Central Bank chief Mario Draghi has signalled that a stimulus reduction could get underway as soon as September, while the US Federal Reserve has kept a hawkish stance on interest rates despite a recent run of soft inflation data.
The 10-year German yield has almost doubled in the past two days, boosting the euro against the dollar, while US yields are at two-week highs.
The US S&P 500 posted its biggest one-day fall in almost six months, the losses filtering through to Asia where markets slipped about 0.5%.
MSCI’s benchmark emerging equity index fell 0.8%.
“It’s a combination of Draghi and the Yellen comments – Draghi pushing up US Treasury yields and Yellen highlighting stretched risky asset prices,” said Simon Quijano-Evans, a strategist at L&G Investment Management.
He was referring to comments by Fed chair Janet Yellen who said on Tuesday that rates would rise gradually and that “some asset valuations look high”.
The German bond sell-off will likely take a toll on eastern European debt markets, with Polish yields rising to one-month highs.
Quijano-Evans said the main impact could be on the Czech crown, by bringing forward the timing of the first rate rise.
The central bank is expected to hold rates near zero today but a Reuters poll found the first rise could come this year instead of previous expectations of 2018. The crown rose slightly against the euro.
While euro gains pushed the dollar index 0.2% lower, most emerging currencies were flat, although the rouble pulled back 0.3%, hit by renewed oil weakness.
Russian equities slipped 0.2% with shares in embattled conglomerate Sistema down another 0.3%, following falls of 7% and 6% respectively on Monday and Tuesday.
A court on Tuesday froze more than $3bn of Sistema assets as it started hearing a lawsuit brought by state oil firm Rosneft. In the Gulf, the Qatari riyal rose in forward markets versus the dollar to trade as firm as 3.686, the strongest level since mid-June. One-month forwards jumped back to levels seen at the start of the month, when a diplomatic spat with its neighbours first erupted.

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