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Stocks drop, forex muted on central bank rate decisions

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MSCI’s index for emerging market equities dropped 0.6% following two consecutive days of gains

Emerging market stocks were dragged lower on Monday by concerns about China’s economic recovery while currencies were subdued at the beginning of a week brimming with interest rate decisions from central banks.

MSCI’s index for emerging market equities dropped 0.6% by 0932 GMT following two consecutive days of gains. A measure of regional currencies was stable as the dollar struggled to hold on to recent gains.

After waning optimism around the possibility of early U.S. interest rate cuts depressed sentiment towards risk-sensitive EM assets for most of last week, investors are on guard ahead of policy decisions from South Africa and Turkey.

The ECB and the BoJ are also due to give their policy on rates this week.

China’s blue-chip index dropped 1.6%, while the yuan held steady against the dollar after the PBOC kept benchmark lending rates unchanged at their monthly fixing.

China’s major state-owned banks moved to tighten yuan liquidity in the offshore foreign exchange market on Monday, according to sources with knowledge of the matter.

China’s disappointing economic growth “is a drag on overall EM sentiment”, said Jon Harrison, MD of emerging market macro strategy at TS Lombard.

Overall, we prefer LatAm (Latin America), specifically Brazil. The ongoing monetary easing will raise consumer sentiment and boost equity markets, which remain undervalued despite the gains late last year, Harrison said.

Stocks in Taiwan remained a bright spot, gaining 0.8% as technology shares received a boost from optimism around AI.

Such enthusiasm, triggered by Taiwanese chipmaker TSMC’s upbeat forecast had also pushed the benchmark U.S. S&P 500 index to a record high on Friday.

The South African rand and the Israeli shekel slipped 0.9% and 0.7% against the dollar respectively.

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