EMERGING MARKETS-Stocks, currencies take the heat as markets eye Fed meeting

Stocks across emerging markets struggled on Monday, weighed down by losses in China equities on COVID-19 flare-ups and slowdown fears, while currencies were little changed against a firm dollar as investors braced for a sharp U.S. rate hike this week. The benchmark stock index fell 0.5% and has lost nearly 2% so far in July, as tightening moves by central banks and soaring inflationary pressures dented the appeal for riskier assets.

Stocks across emerging markets struggled on Monday, weighed down by losses in China equities on COVID-19 flare-ups and slowdown fears, while currencies were little changed against a firm dollar as investors braced for a sharp U.S. rate hike this week.

The benchmark stock index fell 0.5% and has lost nearly 2% so far in July, as tightening moves by central banks and soaring inflationary pressures dented the appeal for riskier assets. The index has eked out a gain for only one month since last November. Currencies including South Africa's rand, the Indian rupee, and Turkey's lira are down between 1% and 6% on the month so far.

There needs to be a sustained move lower by the U.S. two-year yield to change the current dynamic of currencies being under pressure versus a firm greenback, and a hawkish Federal Reserve will likely see FX selling pressure return, said Jeffrey Halley, a senior market analyst at OANDA. The Fed will conclude its two-day meeting on Wednesday and markets are priced for a 75-basis-point rate hike, with about a 9% chance of a 100-bp hike.

China stocks fell 0.6% as the mainland reported 800 new COVID-19 cases for Sunday, though real estate companies surged after a source told Reuters that Beijing was planning to provide financial support to the sector. The Shanghai Composite Index and the CSI300 index have shed 4.4% and 6%, respectively, this month.

"Investors are fleeing from (China's) more highly valued growth stocks as a property crisis, unsupportive policy backdrop and recurring lockdowns all weigh on sentiment - the path to market prosperity looks murky from this juncture," said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown. Meanwhile, Indonesia's rupiah steadied after the central bank said a plan to sell billions of dollars worth of bonds bought during the pandemic would be conducted carefully.

Turkey's lira declined 0.4%. Business confidence among Turkish manufacturers fell to 103.7 points in July compared to 106.4 points in June, central bank data showed. Elsewhere, Poland's zloty inched up 0.2% as the country's unemployment rate was shown to fall to 4.9% in June, below analysts' expectations of 5.0% and below May's 5.1%.

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