LONDON: Fears of a trade war spooked emerging market investors bracing for an imminent announcement from Washington, with stocks coming under pressure and currencies giving away gains chalked up in the wake of a no-surprise US Federal Reserve rate meeting.
President Donald Trump is expected to announce tariffs on Chinese imports on Thursday in a move aimed at curbing theft of US technology that will likely trigger retaliation from Beijing, stoking fears of a global trade war.
There was no indication of the size and scope of the tariffs, though US trade chief Robert Lighthizer said measures would target China's high-tech sector and could include restrictions on Chinese investments in the United States. China has repeatedly said it has no wish to fight a trade war, but warned that it is ready to do so.
MSCI's emerging market equity benchmark fell 0.4 percent, with indexes in mainland China as well as Hong Kong tumbling more than 1 percent. Bourses in emerging Europe , South Africa and Russia also suffered.
"The risks (of a full blown trade war) have definitely increased - it blows my mind if Trump would really carry this out without keeping the door open for negotiations," said Per Hammarlund, chief emerging markets strategist at SEB. "If you close the door on negotiations, then you are forcing China into retaliatory measures, and it would hurt the US economy too."
The spectre of a trade war also more than offset initial gains in emerging currency markets following a US central bank meeting delivering a widely expected 25 basis point rate hike.
In its first policy meeting under new Fed chief Jerome Powell, the Fed also signalled at least two more increases for 2018, highlighting its growing confidence that tax cuts and government spending will boost the economy and inflation, spurring more aggressive future tightening.
With some investors having bet on four hikes for 2018, the message has been on the softer side for now, sending the dollar to its lowest in more than a month.
"It was a relatively dovish hike," said SEB's Hammarlund.
But emerging currencies such as the South African rand , Russian rouble, the Chinese yuan and the Turkish lira gave up early gains to trade weaker against the dollar.
The Fed move prompted a number of emerging market central banks to follow suit. China's central bank was quick out of the starting blocks, adding a symbolic 5 basis points to the key reverse repo rate under new governor Yi Gang.
Other countries with dollar pegs followed swiftly, with Hong Kong, Kuwait, the United Arab Emirates, Qatar and Bahrain all matching the Fed hike.
However, Hong Kong policymakers also repeated they were ready to defend their peg as the Hong Kong dollar hit a fresh 33-year low of 7.8469 to the dollar, edging ever closer to the bottom of the band at 7.85.
Meanwhile, emerging market borrowing costs rose, with the average yield spread of hard-currency debt over US Treasuries hitting its widest in more than four months.
Peru's spreads blew out at an even quicker pace after President Pedro Pablo Kuczynski, who is ensnared in vote buying allegations, resigned hours before facing a near-certain impeachment vote.
Meanwhile in Brazil, the central bank cut interest rates to an all-time low and unexpectedly signalled it is likely to pursue another reduction at its May meeting as inflation continues to underwhelm.
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