Fed taper talk sends emerging stocks to two-month lows, hits vulnerable currencies

Reuters

By Carolyn Cohn

LONDON (Reuters) - Emerging stocks dropped more than 1 percent to two-month lows and currencies fell on Wednesday on renewed speculation of a withdrawal of risk-supporting U.S. monetary stimulus.

The Indian rupee hit two-month lows before suspected central bank intervention, and the Indonesian rupiah hit 4-1/2 year lows.

Risk aversion grew after Atlanta Federal Reserve President Dennis Lockhart said a reduction of the full Fed's bond-buying programme remained a possibility at the next policy meeting in mid-December, although he did say policy should remain very easy.

Minneapolis Fed President Narayana Kocherlakota said, however, there was a need for aggressive action to foster growth.

Emerging markets have been buffeted by the on-off expectations of Fed tapering over the past six months, and are down 7 percent on the year, underperforming developed markets.

The Fed's stimulus has generally pumped world markets with cheap cash, particularly driving emerging markets.

The MSCI emerging stock index was down 1.25 percent on Wednesday at its lowest since early September.

Chinese stocks fell nearly 2 percent to two-month lows, suffering their worst one-day loss in four months, after a perceived lack of details on highly-awaited reforms from a key Communist Party policy meeting.

"The announcement may have been a small disappointment for markets since so much attention was placed on the release," said analysts at SEB in a client note.

Emerging sovereign debt spreads widened by 1 basis point to 359 basis points over U.S. Treasuries.

In currency trading, India and Indonesia are two of the "fragile five" economies seen most vulnerable to higher U.S. Treasury yields, along with Brazil, South Africa and Turkey.

"Investor concern about macro-fundamental deterioration ... and pressure on emerging market external accounts in the midst of U.S. removal of policy accommodation continue to provide headwinds," said Morgan Stanley analysts in a client note.

The Turkish lira also hit two-month lows after Turkey's current account deficit came in at a wider than expected $3.28 billion in October.

The Romanian leu hit one-month lows and the Hungarian forint hit six-week lows against the euro, and the rouble hit two-month lows against its euro-dollar basket.

The Czech crown hovered at 27 per euro, the target set by the central bank following crown-selling intervention last week. The central bank will likely hold the crown at that rate for at least the next 18 months, governor Miroslav Singer was quoted as saying on Wednesday.

(Editing by Jeremy Gaunt)

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