LONDON (Oct 12): Emerging market stocks declined for a second day as lingering concerns the Federal Reserve will raise interest rates this year dampened demand for higher-yielding securities.

The MSCI Emerging Markets Index fell 0.4% as of 8:57 am in London, set for the biggest two-day drop in a month, as stock gauges in Thailand, the Philippines and China led declines. An index of developing-nation currencies was little changed after dropping to a three-week low on Tuesday. The Fed will release minutes of its September policy meeting on Wednesday, providing possible clues on when rates will rise. Mexico’s peso gained for a third day.

“The risk aversion in the market has accelerated,” said Ho Woei Chen, an economist at United Overseas Bank Ltd in Singapore. “Asian currencies will continue to come under pressure.”

Prospects that the Fed will raise rates for the first time since December have undermined the case for investing in emerging-market assets which has been that they offer higher yields than developed nations where central banks are keeping borrowing costs low to prop up growth.

Emerging market stocks have snapped four months of gains as the market-based odds of a Fed rate hike this year climbed to 68% on Tuesday from 59% at the end of September. Ten-year US Treasury yields have jumped 18 basis points this month, while the Bloomberg Dollar Spot Index increased 1.4%.

“We’ll see more stress on emerging-market currencies as and when a Fed hike gets closer,” said Jeffrey Halley, a market strategist at Oanda Asia Pacific Pte in Singapore. “The main driver is US yields firming across the curve which is a result of the market increasingly pricing in a Fed hike in December.”

Stocks

All 11 industry groups in the MSCI’s stock index dropped, led by real-estate companies and finance shares. Thailand’s benchmark SET Index of shares slumped 4.8%, set for its biggest drop since January 2014, as investors sold the nation’s assets after the royal palace said on Sunday the king’s condition was unstable. The Philippine Stock Exchange Index fell 1.2%, sliding for a sixth day in the longest losing streak in five weeks.

The Hang Seng China Enterprises Index retreated 1.7%, while the Shanghai Composite Index fell 0.2%.

South Korea’s Kospi index was little changed after falling as much as 0.5%. Samsung Electronics Co dropped 0.7% in Seoul. The company’s shares plunged 8% on Tuesday in the biggest tumble since 2008 after it stopped production of problematic Galaxy Note 7 smartphones.

Currencies

The MSCI Emerging Markets Currency Index fell 0.1% after sliding 0.7% on Tuesday. Malaysia’s ringgit weakened 0.3% after Brent crude fell the most in two weeks overnight amid uncertainty over Russia’s willingness to join OPEC efforts to stabilise the market.

The won depreciated 0.3% after recording its biggest one-day drop in a month Tuesday. South Korea’s 10-year government bonds rose for the first time in three days, pushing the yield down two basis points to 1.59%.

The Thai baht dropped 0.8% amid outflows from domestic assets. Global investors sold a net 3.4 billion baht (RM400.04 million) in local bonds yesterday, according to data from the Thai Bond Market Association.

Strong dollar

“What we have been seeing is mostly dollar strength,” said Wu Mingze, a foreign-exchange trader in Singapore at INTL FCStone Inc, a Nasdaq-listed global payments-service provider. “We are already kind of preparing for weakness in emerging FX.”

The rand fell 0.1% after plunging 3.9% on Tuesday, the biggest drop in more than three months. South African Finance Minister Pravin Gordhan was summoned to appear in court on fraud charges next month, the latest twist in a struggle with President Jacob Zuma that could cause the nation’s credit rating to be downgraded to junk.

“I can’t see any news that’s offset those announcements out of South Africa yesterday about the finance minister,” Oanda’s Halley said.

Mexico’s peso gained 0.3%, climbing for a third day.