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Hawkish Fed bets, Russia-Ukraine tensions weigh heavily

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Emerging market shares fell sharply on Monday in anticipation of a hawkish U.S. Federal Reserve this week, while Russia’s volatile rouble steadied at nine-month lows with the West growing increasingly anxious of a possible Ukraine invasion.

After ending last week down 1%, MSCI’s index of emerging market shares slid another 1.2% on Monday, on course for its steepest one-day drop in a month.

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Some analysts are starting to speculate that, though unlikely, the Fed may hike rates this week as inflation surges. Most investors have priced in a 0.25% hike in March and three more by year end.

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Indian shares led losses in Asia, falling more than 2%, while Russian shares sank more than 4%.

Russia’s rouble, which marked its biggest weekly drop in two months on Friday, firmed up to 1% before trading flat, while Ukraine’s hryvnia gave up early gains to trade 0.3% lower.

With sanctions at the ready, the United States and Britain started withdrawing diplomats’ family members from Ukraine as talks with Moscow and the West thus far have made no headway.

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“A hawkish Fed and Ukraine-Russia risks may very oddly manifest as “risk off” resonance,” Mizuho analysts said in a note.

“EMs may feel the heat more acutely as the woes of rising rates and tighter liquidity will be compounded by a stronger USD exposing EMs to higher imported inflation, greater twin deficit slippage and vulnerabilities from external USD-denominated debt.”

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“In that context, (the) Russia-Ukraine threat… present(s) real challenges in terms of rising oil/energy prices and (a) sharp liquidity/USD squeeze.”

Russia’s 10-year OFZ bond yields rose to 9.50%, heading back towards their highest since early 2016.

Russia is also grappling with rising COVID-19 cases, which hit a record 63,205 on Sunday.

Ukraine dollar bonds steadied.

Turkey’s lira slid up to 2.3% on Monday before recovering to rise 0.4%.

During a weekend conference Finance Minister Nureddin Nebati said no interest rate hikes were planned, but added that he expects some $10 billion of forex bank deposits to be converted to lira due to a new law exempting such deposits from corporate tax.

China’s Alibaba slumped 6.3% after a report that its Ant Group affiliate is connected to a corruption scandal involving the former party secretary of Chinese technology hub Hangzhou.

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Mainland Chinese shares were largely unscathed thanks to a slew of monetary policy stimulus measures from the central bank last week.

Struggling property developer China Evergrande Group firmed 3.9% after it named a state firm official to its board. The sector will likely see “significant easing” in the policies that govern it, BNP Paribas Asset Management said in a note.

For GRAPHIC on emerging market FX performance in 2021, see http://tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance in 2021, see https://tmsnrt.rs/2OusNdX

For TOP NEWS across emerging markets

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see

(Reporting by Susan Mathew in Bengaluru; Editing by Jan Harvey)

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