Stocks fall after Powell’s hawkish rates rhetoric

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Emerging market stocks fell sharply on Wednesday and U.S. Treasury yields rose after hawkish comments from Federal Reserve Chair Jerome Powell raised the possibility of large interest rate hikes to tackle sticky inflation.

MSCI’s emerging markets equities index lost 1.4% after Powell on Tuesday said that the Fed will likely need to raise interest rates more than previously expected in response to economic data on the first day of his semi-annual, two-day monetary policy testimony before Congress.

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Following his comments, the two-year Treasury note, which best reflects short-term rate expectations, hit 5% for the first time since July 2007. Money markets now see an over 60% chance of a 50 basis points hike from the Fed in March.

Powell will testify again later in the day before the House of Representatives Financial Services Committee at 10 a.m. ET (1500 GMT).

“The decidedly more hawkish commentary (by Powell) has seen risk off trade in the marketplace evidenced by a stronger dollar and higher U.S. treasury yields,” Shaun Murison, senior market analyst at IG, said.

Gaining some relief after China’s easing of strict COVID-19 restrictions at the beginning of 2023, EM assets have again come under selling pressure from the U.S. central bank’s indication of tighter monetary policy. Modest growth targets from China have also disappointed investors.

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As the dollar rallied, EM currencies dropped 0.5%, on track for the biggest one-day fall in a month.

China’s yuan weakened to a more than two-month low against the dollar, approaching the threshold of 7 per dollar.

The South African rand dropped 0.8% and hit its lowest level in almost three years, extending losses after data on Tuesday showed a sharp economic contraction.

Russian markets were closed for International Women’s Day.

In central and eastern Europe, the Hungarian forint fell 0.8% against the euro.

Data showed the country’s headline inflation slowed slightly to an annual 25.4% in February from 25.7% in January, but that is unlikely to be enough to ease pressure on the central bank as it maintains a hawkish policy.

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Hungary’s central bank Governor Gyorgy Matolcsy called on Prime Minister Viktor Orban’s government to aid central bank efforts to curb inflation.

The Polish zloty was flat against the euro as the central bank’s rate-setting panel meets to decide on interest rates, with inflation surging to its highest in almost a quarter of a century.

Elsewhere in emerging markets, the Export-Import Bank of China told Sri Lanka it will not seek immediate repayment of debt due in 2022 and 2023, according to a letter seen by Reuters. (Reporting by Shubham Batra and Amruta Khandekar in Bengaluru; editing by Barbara Lewis)