Emerging Markets: EM stocks retreat from record highs as AI selloff, Fed hike fears weigh

Samsung Electronics Co

Tue 10:29

South Korea's KOSPI slumps 10%
Hungary's forint slips ahead of rate decision
Fed futures price in 75% chance of a rate hike in September
By Ragini Mathur and Avinash  P

    (Reuters) - Emerging market stocks pulled back from record highs on Tuesday, as a sharp reversal in Asia's AI and chip names rattled risk appetite, while growing expectations that the Federal Reserve could raise interest rates again this year lifted the dollar and pressured developing-world currencies.
MSCI's index of emerging market equities .MSCIEF fell 3.8%, retreating from an all-time high hit in the previous session, with losses led by heavyweight markets South Korea .KS11 and Taiwan .TWII.
     
CHIP SELLOFF DRAGS ASIA LOWER
South Korea's KOSPI slumped 10%, its biggest one-day drop in more than three months, as foreign investors sold chipmakers after regulatory signals that the sector's blistering rally may have run too far.
Samsung Electronics 005930.KS, the country's market bellwether, dropped 12.3%, while SK Hynix 000660.KS lost 12.5%, helping trigger an automatic market-wide trading halt in afternoon trade.
Taiwan's benchmark index, another AI-heavy market in the region, declined 1.3%, retreating from the record closing high it reached on Monday.
     
DOLLAR STRENGTH HITS EM CURRENCIES
"There are two sides to today's moves: the dollar is stronger because the Fed is more assertive on inflation, but there is also some profit-taking and risk reduction after the recent surge in emerging-market equities," said Luca Bindelli, head of investment strategy at Lombard Odier.
"After the strong gains we have witnessed so far this year, we were bound to see some profit-taking at some point whenever volatility picked up."
The equity selloff coincided with broad pressure on emerging market currencies, as the dollar advanced on rising investor bets on a more hawkish Federal Reserve. 
Fed funds futures are now pricing in a 75% chance of a rate hike by September. BofA Global Research and Deutsche Bank have also dropped earlier calls for the Fed to remain on hold, and now expect U.S. rates to rise within the year, citing economic resilience.
With AI valuations stretched and rate-cut hopes fading, investors were quick to lock in gains. The reversal underscored the fragility of the recent rally in emerging markets. 
Against that backdrop, the Chinese yuan CNY=CFXS eased 0.1%, while Thailand's baht THB=TH fell as much as 0.8% to a 13-month low ahead of Wednesday's central bank decision. The Bank of Thailand is widely expected to leave rates unchanged, according to a Reuters poll.
The broader EM currency index .MIEM00000CUS was down 0.2%.
Investors were also watching the Middle East, after the United States waived sanctions on Iran for 60 days from Monday following the first talks under a nascent peace deal.
In central Europe, currencies weakened against both the euro EUR= and the dollar, while regional stocks also declined. Poland's benchmark .WIG dropped 1.6%.
The Hungarian forint EURHUF= slipped 1% against the euro, although it remains about 7.8% stronger so far this year.
Hungary's central bank is expected to cut its base rate by 25 basis points to 6.00% later on Tuesday, with the currency's recent strength, lower inflation and easing global market risks giving policymakers room to loosen policy, according to a Reuters poll.
South African assets also weakened, with equities .JTOPI down 1.8% and the rand ZAR=D3 falling 0.5%.
Turkish stocks .XU100 declined 1.2%, while the lira TRYTOM=D4 firmed.
Separately, investors awaited MSCI's decision on whether Indonesia will retain its emerging market status or move closer to a downgrade, a move that could intensify outflows from the world's worst-performing stock market.
     
HIGHLIGHTS:
     
** Thai cabinet approves $115 billion draft budget bill for 2027 fiscal year, official says
** India's June private sector growth slips to three-month low as demand, confidence cool, PMI shows
     
     
For TOP NEWS across emerging markets nTOPEMRG
For CENTRAL EUROPE market report, see CEE/
For TURKISH market report, see .IS
For RUSSIAN market report, see RU/RUB

(Reporting by Ragini Mathur and Avinash P in Bengaluru; Editing by Andrew Cawthornbe)
((Ragini.Mathur@thomsonreuters.com;))