Hawkish Fed triggers emerging market outflows in September

LONDON, Oct 7 (Reuters) - Foreign investors ‌pulled $26.3 billion out ​of ​emerging market stocks and bonds in September, the first monthly outflow since June, as a hawkish US Federal Reserve drove up yields and the ‌dollar, a report by the Institute of International Finance showed on Wednesday.

Non-resident ⁠investors pulled $7 billion from the emerging market fixed income sector last month, the first net outflows since ‌March, when the escalating Middle East ‌conflict roiled global markets.

Emerging markets came under pressure in September after the Fed, now led by Kevin Warsh, raised rates for the first time since 2023 and signalled ​inflation remained a concern. The move by the central bank's Federal Open Market Committee sent US Treasury yields sharply higher, lifted the dollar and saw investors pull back ⁠from some riskier assets.

"The pressure built in the second half of the month, as hard currency bond funds turned ​to outflows in the week of the FOMC decision and EM dollar credit spreads widened," the report found.

"Looking ahead, a hawkish Warsh ​Fed that projects further hikes, a BoJ (Bank of ‌Japan) at its highest policy rate since 1995 and broad tightening across advanced economies all raise the hurdle for EM carry into the ⁠fourth quarter," it added.

Meanwhile, heavy foreign selling of South Korean stocks drove a $19.2 billion outflow from emerging market equities in September, the IIF found.

"Foreign selling of Korean equities has run through most ⁠of the year, and its September peak came after a 62% rise in the KOSPI this ​year," the IIF said in its monthly report.

The retreat also coincided with a cooling in the AI-driven technology rally that had helped propel several Asian markets this year, prompting investors to lock in ‌gains in richly valued chip and technology stocks.

Across the fixed income universe, all regions recorded outflows in September, the IIF noted, though ‌the asset class had still enjoyed a year-to-date $246 billion inflow from foreign portfolio investors.

However, the ⁠picture was bleaker for equities, where ‌year-to-date outflows now stand at $113.9 ​billion against $27.3 billion over the same period last year. Excluding China, the tally reached $151.5 billion.

(Reporting by Karin Strohecker; Editing by Andrew Heavens and ‌Paul Simao)

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