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By Natsuko Waki
LONDON, March 20 (Reuters) - Emerging stocks fell more than 1 percent on Thursday after the Federal Reserve hinted at an earlier-than-expected interest rate hike, which would further reduce the flow of cheap money that has bolstered emerging markets in the past few years.
China’s yuan hit a one-year low against the dollar and was on track for its biggest weekly loss in at least 20 years, a move that weighed on some Asian currencies.
But many other emerging currencies steadied, helped by the absence of a follow-through rally in the dollar and the lack of further escalation in political tensions in Russia and Ukraine.
“There is quite a limited reaction in central and eastern Europe to the news from the Fed. They are more calm on the fact that there is no further bad news on the Ukraine and Russia situation,” said Stanislava Pravdova, analyst at Danske Bank.
“However, concerns over the Chinese economy will be the dominant factor for emerging markets. We need to see the extent of a Chinese slowdown.”
The Fed cut monthly bond purchases by $10 billion as expected on Wednesday. Fed chair Janet Yellen said the bank will probably end its bond-buying programme in the autumn and could start raising interest rates around six months later .
The benchmark MSCI emerging equity index fell 1.3 percent , outpacing losses in its developed market counterpart .
The yuan fell as low as 6.2321 after the central bank set a lower guidance for the currency. The bank has been guiding the yuan lower to introduce a two-way risk in trading and also prepare the ground for further liberalisation of the market.
China’s economy has lost steam in the first two months of the year, and the country’s first domestic bond default and subsequent media reports of trouble at other companies has added to pressure in its financial markets.
The rouble was steady at 36.14 per dollar while Russia sovereign dollar bonds also steadied. The cost of insuring Russia’s debt for five years ticked higher to 252 basis points, according to Markit.
Analysts say many of Russia’s local financial markets have largely priced in political and economic risks after a recent sell-off.
Investors concerned about access to domestic markets also bought offshore Russian stocks - such as Global Depository Receipts - pushing their premium higher to onshore counterparts .
“People did not want to be holding rouble-denominated assets as a function of the declining currency and the possible sanctions around rouble assets. ADR/GDR instruments were perceived as safer,” said Dale Brooksbank, head of the European trading team at State Street Global Advisors.
“The potential for further stringent sanctions on Russian financial assets in some form remains a very real possibility. The actual valuations of underlying Russian stocks is incredibly cheap which has prompted some deep value fundamental managers to review their positions.”
Colombia’s peso was steady after staging its biggest rally in six months on Wednesday after JP Morgan said it would boost the weighting of the country’s peso-denominated debt in two closely followed emerging bond indexes.
Turkey, Indonesia, Russia, Thailand and Hungary were likely to see their weightings decline.
For GRAPHIC on emerging market FX performance 2014, see link.reuters.com/jus35t
For GRAPHIC on MSCI emerging index performance 2014, see link.reuters.com/weh36s
For GRAPHIC on MSCI emerging Europe performance 2014, see link.reuters.com/jun28s
For GRAPHIC on MSCI frontier index performance 2014, see link.reuters.com/zyh97s
For CENTRAL EUROPE market report, see
For TURKISH market report, see
For RUSSIAN market report, see ) (Additional reporting by Sujata Rao and Carolyn Cohn; Editing by Toby Chopra)