LONDON: Emerging market stocks snapped a three-day winning streak on Tuesday and currencies weakened after the Bank of Japan disappointed investors already nervous before a meeting of the U.S. Federal Reserve.
MSCI's emerging market stock index fell 1 percent, weighed down by sharp losses on Asian bourses after the Bank of Japan painted a gloomier outlook for the world's third-largest economy.
Signs the commodity price rally was fizzling out added to the sombre mood as investors awaited clues to the U.S. monetary policy outlook from the Federal Reserve's two-day policy meeting starting later in the day.
"There's a bit of a reassessment ahead of the Fed as well ... if the Fed continues to argue in favour of two rate hikes, that can support the dollar against EM currencies," said Manik Narain, emerging FX strategist at UBS.
"It has been quite a strong start to the year for EM so it is natural the market becomes a bit more demanding on incremental growth and central bank support before pushing these markets even stronger."
South African stocks and Turkish equities dropped about 1 percent, while a $1-plus oil price fall caused a broad selloff across Gulf bourses.
Lower crude also weighed on Russia's rouble, which fell by 1 percent against the dollar.
South Africa's rand slipped 0.7 percent after earlier hitting a 12-day low before Thursday's central bank meeting. The market is currently split between expecting no change to rates and a quarter point hike, Narain noted.
"If the (central bank) decides to come with more front-loaded aggressive tightening, that might also be seen as an example of EM policy-makers becoming more conservative and trying to backstop any deterioration in inflation expectations."
Turkey's lira weakened 0.8 percent after trading at its strongest against the greenback in almost four months on Monday.
Across central and eastern Europe, currencies also came under pressure, with Poland's zloty retreating from the strongest level in 10-weeks it hit on Monday.
In Egypt, the central bank held the pound steady at 8.85 pounds to the dollar after devaluing the currency by more than 14 percent on Monday and saying it would aim for a more flexible exchange rate policy.
Egyptian stocks, which had jumped almost 7 percent on Monday, rose more than 2 percent to hit their highest level in more than four months.
Late on Monday, the International Monetary Fund approved a $1.5 billion stand-by facility for Kenya, though the country said it planned to draw on it only in case of "exogenous shocks".
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