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Emerging Markets Slide as Fed Signals Higher Rates For Longer

(Bloomberg) -- Emerging-market stocks and currencies pared losses on Monday as investors began reviewing their bets for when the Federal Reserve will start reducing interest rates.

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Developing-nations assets slid after Fed Chair Jerome Powell said over the weekend the US may have to wait beyond March for the central bank to cut rates, before partially recovering later.

MSCI Inc.’s index for emerging-markets stocks dropped 0.5% on Monday, bringing the fall to 3.93% in the year.

Currencies also declined, with the MSCI gauge down 0.36%, the most since mid-January. The Chilean peso led losses, after it weakened to the lowest level since the final quarter of 2022, along with the Brazilian real.

Equities in China, which account for a large share of global EM benchmarks, saw another volatile session after last week’s rout, as investors assessed pledges by policymakers to stabilize the market.

Read More: China Widens Stock Trading Curbs on Quants, Offshore Units

At the end of the session in Asia, authorities tightened trading restrictions on domestic institutional investors as well as some offshore units, according to people familiar with the matter.

“More than Fed interest rate cuts, what markets are most desperate for is reason to excuse risk appetite,” said Juan Perez, director of trading at Monex USA. “If indeed China can recuperate some growth and not be so stagnant while commodities find their way, emerging-market currencies can find relief,” he added.

In Latin America, Paraguay tapped international bond markets with a 12-year dollar note as it looks to buy back existing debt, days after S&P upgraded the nation to just one notch below investment grade.

Peru’s credit rating could be impacted if it starts showing structurally higher fiscal deficits after missing its target last year, Fitch Ratings said on Monday.

“Fitch will continue to assess the risk that fiscal pressures and weaker post-pandemic potential growth start leading to structurally higher deficits and debt in the medium term,” it said. The Peruvian sol fell 0.44%.

Assets in Turkey took the surprise changing of the guard at the central bank largely in stride, with the lira down 0.2% against the dollar. Data on Monday showed Turkish monthly inflation jumped the most since August, an upswing that could test policymakers’ resolve to quell price increases quickly after halting interest-rate increases last month.

Senegal’s eurobonds fell sharply after President Macky Sall postponed this month’s presidential elections and as lawmakers gathered to consider extending his mandate until a successor takes power.

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