September 27, 2018 / 9:12 AM / 19 days ago

EMERGING MARKETS-Fed hike, Italy budget fear weigh on emerging FX

LONDON, Sept 27 (Reuters) - Emerging currencies weakened, bond spreads rose and stocks trod water on Thursday in the wake of another U.S. rate rise, with reports of a possible delay to Italy’s budget weighing on investor appetite for riskier assets.

The dollar index rose 0.3 percent to a one-week high after the U.S. Federal Reserve raised rates by a quarter of a percentage point, and projected another rate hike in December, three more next year and one increase in 2020.

However, 10-year U.S. Treasury yields fell more than 5 basis points to 3.048 percent, pulling back from four-month highs as market participants had been braced for a more hawkish stance.

“The Fed event was widely anticipated and the tweaks they made were so small it really doesn’t have much of an impact on EM so traders are looking for what’s next,” said Per Hammarlund, chief emerging markets strategist at SEB.

“It’s a bit directionless at the moment ... that’s why you are seeing a mixed reaction.”

The average yield spread of emerging market sovereign bonds over safe-haven U.S. Treasuries on the JPMorgan EMBI Global Diversified index rose to 347 basis points, a six-day high.

Currencies were mainly weaker, with the Mexican peso down 0.4 percent, also hindered by U.S. President Donald Trump’s criticism of Canada over the slow pace of NAFTA talks. South Africa’s rand fell 0.2 percent and India’s rupee eased 0.1 percent.

The Israeli shekel weakened 0.5 percent in the wake of comments from Trump that he wanted a two-state solution to resolve the Israeli-Palestinian conflict. Arab allies of the United States are strong supporters of a two-state solution.

But the Turkish lira firmed 0.3 percent, even as economic confidence tumbled the most in a decade.

Hammarlund said there was investor caution ahead of Italy’s budget presentation, which some fear could lead to a blowout of the country’s deficit and put the government on a collision course with the European Union.

A newspaper report on a possible delay to the budget fuelled a sell-off in the country’s bonds and stocks and the euro. “Markets are a bit apprehensive - that is weighing on some of the Eastern European currencies,” Hammarlund said.

The Czech crown fell 0.26 percent against the euro and the Polish zloty softened 0.13 percent.

MSCI’s benchmark emerging equities index failed to make much headway as a lacklustre opening in emerging Europe followed a mixed performance in Asia.

The biggest fallers included Poland and India , both down 0.5 percent, and South Africa, down 0.6 percent.

Chinese mainland fell 0.5 percent with China’s industrial profit growth hitting a five-month low, fanning concerns about faltering domestic demand.

News that index provider FTSE Russell would include Chinese A-shares in its key benchmarks from June next year offered little support. Market participants had expected the announcement, which is likely to attract initial net inflows of $10 billion from passive investors.

Elsewhere in Asia, South Korean stocks rose 0.7 percent as the market reopened after a three-day holiday. Indonesian shares climbed 0.6 percent with the central bank delivering an expected 25-basis-point rate rise, its fifth since May.

Overnight, Argentina’s peso firmed about 0.1 percent after the International Monetary Fund increased its three-year lending programme with Argentina by $7 billion to $57 billion, on the condition that the central bank halt its full-scale interventions to support the peso.

For GRAPHIC on emerging market FX performance 2018, see tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance 2018, see 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) Emerging Markets Prices from Reuters Equities Latest Net Chg % Chg % Chg

on year

Morgan Stanley Emrg Mkt Indx 1047.41 +1.39 +0.13 -9.59

Czech Rep 1102.45 +1.68 +0.15 +2.25

Poland 2290.43 -14.02 -0.61 -6.94

Hungary 36118.04 +122.00 +0.34 -8.28

Romania 8361.59 -13.31 -0.16 +7.84

Greece 699.93 -1.96 -0.28 -12.77

Russia 1166.90 +6.12 +0.53 +1.08

South Africa 50070.98 -290.88 -0.58 -4.69

Turkey 99457.99 +309.13 +0.31 -13.76

China 2791.78 -15.04 -0.54 -15.58

India 36342.84 -199.43 -0.55 +6.71

Currencies Latest Prev Local Local

close currency currency

% change % change

in 2018

Czech Rep 25.71 25.64 -0.27 -0.70

Poland 4.28 4.27 -0.17 -2.35

Hungary 323.38 323.41 +0.01 -3.97

Romania 4.66 4.66 -0.04 +0.39

Serbia 118.38 118.36 -0.02 +0.02

Russia 65.83 65.87 +0.05 -12.42

Kazakhstan 361.97 360.37 -0.44 -8.06

Ukraine 28.28 28.14 -0.50 -0.48

South Africa 14.15 14.12 -0.23 -12.69

Kenya 100.90 100.80 -0.10 +2.18

Israel 3.60 3.58 -0.51 -3.35

Turkey 6.07 6.09 +0.32 -37.60

China 6.88 6.88 -0.01 -5.39

India 72.65 72.59 -0.08 -12.14

Brazil 4.03 4.03 -0.00 -17.83

Mexico 18.91 18.83 -0.39 +3.91

Debt Index Strip Spd Chg %Rtn Index

Sov’gn Debt EMBIG 373 6 .20 7 74.53 1

Reporting by Claire Milhench; Editing by Dale Hudson

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