FOMC minutes weigh on risk appetite

Emerging market stocks and currencies fell on Thursday on the signals by Wednesday’s FOMC Minutes. The minutes obviously signaled further US interest rate hikes.

MSCI’s index of emerging market stocks retreated 0.6%, set for their worst session in two weeks, while its currencies counterpart MIEM00000CUS was on course for its steepest one-day fall in two months as the dollar got a small boost from the minutes.

After two 75 basis point rate hikes this year, the Fed tempered expectations for another large increase in September, but members saw the need to keep cooling inflation, the minutes showed. Traders now see a slightly higher chance of a 50 bps hike next month.

Expectations for another 100bps in hikes by the US Fed by year-end, with risks to the upside if inflation does not slow in line with forecasts, are maintained by several economists.

High US borrowing costs increase the appeal of the dollar and US bonds, and tend to divert capital flows from riskier assets. This has led to several currency crises in emerging markets in the past.