LONDON: South Africa's rand fell 1 percent on Wednesday and bond yields spiked on investor worries over a standoff between the finance minister and an elite police unit, whilst broader emerging stocks touched one-week lows.
Markets were waiting to see if the Federal Reserve meeting would signal rate hikes later this year, and most emerging assets wilted as the U.S. dollar rose to a five-day high.
In South Africa, police threats of legal action against Finance Minister Pravin Gordhan revived memories of last December's run on markets when President Jacob Zuma inexplicably fired Gordhan's predecessor.
The rand touched two-week lows against the dollar after Tuesday's 2.6 percent fall, and five year credit default swaps rose two basis points (bps) to 334 bps, according to Markit, after surging 14 bps on Tuesday.
"Clearly the market is building a political risk premium back in for South African assets," said Murat Toprak, an EM strategist at HSBC. "This is a really critical point. The market is questioning whether Gordhan will stay."
The yield on South Africa's benchmark 2026 bond hit 2-1/2-week highs of 9.56 percent, with expectations growing of a rate rise at Thursday's central bank meeting.
"We think they will hike by 25 bps, but will it be enough to prevent the fall in the currency? That is very much unknown," Toprak said.
MSCI's benchmark emerging stocks index touched a one-week low after falling 1.6 percent on Tuesday, as investors waited for the U.S. Fed to provide fresh guidance on the pace of tightening this year.
SEB's emerging market economist Per Hammarlund said some investors had become concerned the Fed could surprise by being more hawkish than expected, which "could cause a sell-off in emerging markets".
Individual stock market performance was mixed, with Chinese mainland shares slightly higher after the premier defended the country's economic policies and vowed there would be no hard landing.
The People's Bank of China (PBOC) also cut the rates on its medium term lending facility for banks.
Russian stocks rose around half a percent, helped by firmer oil prices, but the recent rally in Hungary shares stuttered, with Budapest down 0.1 percent.
The lira eased 0.25 percent as Turkish police detained 20 suspects in raids targeting the PKK militant group.
The Polish zloty slipped 0.2 percent against the euro as the market eyed the cost of converting foreign exchange loans into zlotys.
On Tuesday Poland's financial watchdog said a proposed bill to convert these mortgages could cost banks up to eight times their 2015 profits, potentially pushing one of Europe's healthier banking sectors into crisis.
Mozambique's metical currency slid 6 percent after Moody's and Standard & Poor's issued ratings downgrades. There are mounting concerns about a proposed debt restructuring for an $850 million bond issued by state-run tuna-fishing company Ematum.
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