LONDON, March 21 (Reuters) - Emerging market stocks and currencies softened on Wednesday and borrowing costs pushed higher as investors geared up for the first U.S. rate hike of the year, while optimism over the future of the NAFTA trade pact lifted Mexico's peso higher.
MSCI's emerging markets benchmark slipped 0.2 percent with many Asian bourses chalking up losses that could not be offset by gains in Russia , Turkey and South Africa.
Uncertainty over the outlook for U.S. interest rates and heightened signs of possible tit-for-tat trade measures have frayed investors' nerves in recent weeks.
China vowed it would take steps to safeguard its interests and those of its industries, accusing Washington of acts of trade protectionism. U.S. President Donald Trump is expected to unveil tariffs of up to $60 billion on Chinese technology and telecoms products by Friday.
Markets have meanwhile priced in a quarter point interest rate hike from the U.S. Federal Reserve, which is due to publish its decision later in the day, but are less certain over whether to expect three or four increases for the year.
Expectations of higher borrowing costs for emerging markets have pushed up the average yield premium demanded by investors to hold emerging market hard currency sovereign debt to its widest in four months. JPMorgan's EMBI Global Diversified index has widened by 36 basis points since Feb. 1 when it hit its lowest level in more than 3-1/2 years.
"The market has yet to fully decide on the level of hawkishness to expect from the Fed today," said Inan Demir, senior emerging economist at Nomura International.
"There are uncertainties about how the Fed will communicate even if it signals a fourth hike in 2018. It may well be couched in terms that could be seen as not too hawkish, so the market is yet to decide on what to expect, and in that sense it is open to surprises on both sides."
While most emerging market currencies were treading water ahead of the Fed decision, the Mexican peso jumped 0.7 percent against the dollar, its biggest daily gain in a month.
The currency was buoyed by reports Washington had dropped a demand that all vehicles made in Canada and Mexico for export to the United States contain at least 50 percent U.S. content.
"If true, that would be a big negotiation move but ultimately everyone will be waiting for the president to make his final verdict," said Simon Quijano-Evans, emerging markets strategist at Legal & General Investment Management.
The Hong Kong dollar hit a 33-year low, inching ever closer to the bottom threshold of the monetary authority's targeted trading band, as the interest rate gap between U.S. dollar rates and their Hong Kong counterpart widened further. The former British colony pegs its currency to the greenback and so its money market rates mirror those of the U.S.
Mozambique Eurobonds steadied at a one-month low hit on Tuesday in late trading after Maputo kicked off restructuring talks in London with a proposal that was swiftly rejected by a core group of its creditors.
Both sides expect that the process to restructure around $2 billion of external debt of one of the world's poorest countries will be a complicated and drawn-out process.
For GRAPHIC on emerging market FX performance 2018, see http://tmsnrt.rs/2e7eoml For GRAPHIC on MSCI emerging index performance 2018, see http://tmsnrt.rs/2dZbdP5
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Equities Latest Net Chg % Chg % Chg
Emrg Mkt Indx 1207.44 -2.45 -0.20 +4.23 Czech Rep 1125.22 +4.44 +0.40 +4.36 Poland 2275.27 +3.18 +0.14 -7.55 Hungary 37945.56 -8.73 -0.02 -3.64 Romania 8749.20 +17.21 +0.20 +12.84 Greece 805.21 -0.37 -0.05 +0.35 Russia 1265.46 +9.46 +0.75 +9.62 South Africa 51615.22 +180.38 +0.35 -1.75 Turkey 17205.11 +773.32 +0.66 +1.62 China 3281.59 -9.05 -0.27 -0.77 India 33147.60 +150.84 +0.46 -2.67 Currencies Latest Prev Local Local close currency currency
% change % change
Czech Rep 25.42 25.42 -0.00 +0.42
Poland 4.24 4.23 -0.25 -1.51
Hungary 311.34 311.36 +0.01 -0.26
Romania 4.67 4.66 -0.08 +0.24
Serbia 118.54 118.39 -0.13 -0.12
Russia 57.57 57.56 -0.02 +0.16
Kazakhstan 320.70 320.70 +0.00 +3.77
Ukraine 26.28 26.32 +0.15 +7.10
South Africa 12.00 11.96 -0.33 +3.00
Kenya 101.00 101.10 +0.10 +2.08
Israel 3.48 3.48 +0.05 +0.05
Turkey 3.93 3.93 -0.03 -3.69
China 6.33 6.33 +0.07 +2.81
India 65.22 65.20 -0.02 -2.12
Brazil 3.31 3.31 -0.02 +0.01
Mexico 18.62 18.77 +0.77 +5.50
Debt Index Strip Spd Chg %Rtn Index
Sov'gn Debt EMBIG 317 -1 .00 7 87.77 1
(Reporting and graphic by Karin Strohecker, additional reporting by Claire Milhench)