* S&P cuts Turkey rating deeper into junk in surprise move
* EM suffers first monthly outflows since Nov. 2016 - IIF
* Hard-currency EM debt spreads at widest level in 10 months
By Karin Strohecker
LONDON, May 2 (Reuters) - The strong dollar and mixed economic data kept the pressure on emerging stocks on Wednesday but currencies bounced back from steep losses as markets waited to hear from the U.S. Federal Reserve on the future path of interest rates.
MSCI’s emerging markets index fell 0.4 percent to extend losses for a second straight day, though technology stocks inched higher following forecast-beating earnings by Apple.
The sober mood spread as the dollar clocked up healthy gains at the start of the week and broadly held onto the rises on Wednesday as investors awaited the Fed’s policy statement.
The Fed is expected to keep interest rates steady but will likely encourage expectation that it will lift borrowing costs in June on the back of rising inflation and low unemployment.
Though pressure on emerging markets also manifested itself in debt markets, with average yield spreads over safe-haven U.S. Treasuries widening to a fresh 10-month peak as the JPMorgan EMBI Global Diversified climbed to 313 basis points.
The steady rise in the greenback together with the recent rise in U.S. Treasury yields had prompted international investors to pull money out of emerging markets for the first time in April since late 2016, the Institute of International Finance found in its latest report.
“The rise of 10-year U.S. Treasury yields — in tandem with a stronger dollar — have been the key drivers of this downturn,” the IIF said. “Foreign investors have withdrawn more than $5.5 billion from EM debt markets since April 16 — a slightly faster pace than that seen during the taper tantrum in May 2013.”
Adding to the cautious sentiment on the day was a raft of data, painting a mixed picture for manufacturing activity.
While Purchasing Manager Index (PMI) data from India showed factory growth accelerating, China factory activity edged up marginally though records shrinking export orders. . Meanwhile both Malaysia and South Korea saw factory activity shrink, while across most readings, export orders show weakness.
Data from emerging Europe showed a better picture, with both Polish and Czech PMIs recording accelerating growth.
Yet data from Turkey showed the manufacturing sector shrinking following 13 months of growth.
This followed hot on the heels of data showing Turkey’s trade deficit increased nearly a third year-on-year in April and a cut of Ankara’s sovereign rating into deeper “junk” territory in a surprise move by S&P Global Ratings, ting widening concern about the outlook for inflation amid a recent lira sell-off. The confluence of data made the lira gave up early gains, to trade flat against the dollar.
Meanwhile currencies elsewhere bounced following two days of hefty losses. South Africa’s rand and Russia’s rouble strengthened 0.5 percent while Mexico’s peso gained 0.3 percent.
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Reporting by Karin Strohecker Additional reporting by Marc Jones Editing by Andrew Heavens