Emerging Assets Tumble as Fed Ushers in Tighter Financing Era

  • Currencies, stocks decline as U.S. dollar rises for third day
  • Mexico’s peso rallies as Banxico boosts key rate to 5.75%

A Deep Dive Into Emerging Markets With Greylock's Ferro

Emerging-market stocks and currencies dropped the most in a month after the Federal Reserve combined an anticipated interest rate increase with a surprise signal it will be more hawkish than expected next year.

“This is a Fed that could be tighter than we thought,” said Mohamed El-Erian, the chief economic adviser at Allianz SE and a Bloomberg View columnist. “That’s what really moved the market.”

El-Erian discusses investor reaction to the Federal Reserve’s decision to raise

Markets: Middle East.

The Federal Reserve boosted borrowing costs by 25 basis points and forecast a steeper path in 2017. That could spell trouble for emerging markets as higher dollar rates reduce the appetite for riskier assets. Policy makers in Saudi Arabia, Qatar, Kuwait, the United Arab Emirates and Bahrain raised interest rates since the Fed’s announcement on Wednesday.

CHART: Here’s a scorecard for Emerging-Market Exposure to Fed

Bloomberg’s Richard Breslow: The MSCI emerging currency index has given up the ghost after trying to claw its way back above the 200-day moving average. Its Fibonacci retracement chart has gone from looking cautiously optimistic to a classic fail.

Markets

  • The MSCI Emerging Market Index fell 1.6 percent as all industry gauges dropped
  • The MSCI Emerging-Markets Currency Index declined 0.9 percent; Chile’s peso sank amid speculation the central bank will cut its key rate in January
  • Mexico’s peso led gains as Banxico raised rates more than expected

Research

  • Barclays Sees Mexico consumption slowing as inflation picks up
  • Brazilian reforms help curb U.S. fed hike impact on real, says Votorantim, as they work as an “anchor” for the positive sentiment
  • BNP Paribas favors Indian stocks, Indonesian bonds and currency and Brazil’s real in emerging markets
  • Bank of Korea is expected to cut interest rates next year because of worsening growth outlook after holding on Thursday, Capital Economics says
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