EMERGING MARKETS-EM currencies, stocks fall as Fed hike bets, oil prices weigh

By Utkarsh Hathi

Sept 24 (Reuters) - An index of emerging market currencies headed for its steepest daily drop in six months on Thursday, while stocks also came under pressure as firmer oil prices and expectations of further Federal Reserve rate hikes pushed bond yields higher.

The 10 year US Treasury yields surged to its highest since 2007, as a stronger-than-expected purchasing managers' report ignited fresh inflation fears and an auction of five-year notes was poorly received.

Money markets are pricing in nearly a 70% chance of an interest rate hike from the Fed in its October policy meeting, according to CME Group's FedWatch tool.

"We expect the Fed to raise rates at least two more times, creating a stronger headwind for emerging market currencies going into the next quarter," said Jeffrey Schultz, head of CEEMEA economics, BNP Paribas.

"We are entering a bit of a dangerous period for risky assets. There could be pressure on EM high-yielding currencies, particularly those that face heavy long positioning such as the ZAR, HUF and BRL."

MSCI's index tracking EM currencies .MIEM00000CUS was down 0.45%, as the US dollar remained steady near a two-month high. The benchmark index was heading for its biggest fall since March 19.

South Africa's rand fell 0.4%, extending losses to hit a seven-week low, after the central bank on Wednesday raised benchmark interest rate by 25 basis points to steer inflation back toward its 3% target.

The Hungarian forint was down 0.2%, extending its declines after recording its steepest fall in more than a month in the previous session.

Hungary's central bank lowered its inflation target on Tuesday, signalling that it is sticking to its aim of adopting the euro and boosting appetite for local bonds, which outperformed Polish and Romanian peers.

Schultz argued that monetary policy in the EM remains slightly on a more credible path due to central banks reacting early and that BNP Paribas was still quite constructive on the asset class.

The Indonesian rupiah fell the most among its Asian peers, down 0.5%, while the Korean won declined 0.3%.

Most Asian equity markets were lower, with Chinese equities .CSI300 slipping 1.7% as investors weighed their prospects of a breakthrough in a meeting between US President Donald Trump and Chinese President Xi Jinping.

MSCI's index tracking EM stocks .MSCIEF fell 0.9%, weighed by firmer oil prices, with US and Iran still far off from a deal to end the Middle East conflict.

In Central & Eastern Europe, Romanian benchmark .BETI fell 1.4% and Polish blue-chip stocks .WIG20 slipped 0.3%.

In Turkey, a state news agency said that Finance Minister Mehmet Simsek will hold a series of meetings on Thursday and Friday to discuss the process of the liquidation of 131 investment funds worth around $18 billion. Authorities stepped in last week to support financial stability amid a stock market sell-off.

Turkish benchmark .XU100 was down 1.2%, while the Turkish lira was muted.

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