Emerging markets post September outflows as hawkish U.S. Fed hits bonds and equities

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Emerging markets September outflows

Highlights

Non-resident investors withdraw $7 billion from emerging market fixed income in September, marking the first net outflows since March amid global market turmoil.
The Federal Reserve under President Kevin Warsh raises rates for the first time since 2023, sending U.S. Treasury yields and the dollar higher and pressuring emerging market assets.
Foreign selling of South Korean equities triggers a $19.2 billion outflow from emerging market equities in September, the largest sector drag during the risk asset retreat.

September selloff driven by Fed tightening

As reported by Reuters, citing the Institute of International Finance, non-resident investors pull $7 billion from emerging market fixed income in September, the first net outflows since March, when the escalating Middle East conflict roils global markets.

Emerging markets come under pressure after the Federal Reserve under President Kevin Warsh raises rates for the first time since 2023 and signals that inflation remains a concern. The move sends U.S. Treasury yields sharply higher, lifts the dollar and prompts investors to pull back from riskier assets.

The IIF says pressure builds in the second half of the month, as hard currency bond funds turn to outflows in the week of the FOMC decision and emerging market dollar credit spreads widen. It adds that a hawkish Fed projecting further rate hikes, a Bank of Japan at its highest policy rate since 1995 and broad tightening across advanced economies all raise the hurdle for emerging market carry trades in the fourth quarter.

South Korean equities lead broader emerging market retreat

Heavy foreign selling of South Korean stocks drives a $19.2 billion outflow from emerging market equities in September, making it the biggest drag within the broader retreat from risk assets.

The September reversal marks the first monthly outflow from emerging market stocks and bonds since June, highlighting how quickly global monetary conditions can reshape investor appetite across developing economies.

In our earlier article on the renewed global bond sell-off, we explained how inflation risks, elevated oil prices and worries about heavy public debt were pushing long-dated yields higher in the U.S. and Europe. We noted that the jump in borrowing costs was spilling into other asset classes by weighing on equities and currencies, while increasing scrutiny of fiscally stretched governments such as France and the UK.

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