* MSCI EM stocks index down 1.2%; currency index off 3-month highs
* Fed expects U.S. economy to shrink 6.5% this year
* Fed says pandemic impact to be felt for years
* Declining oil prices weigh on Russia’s rouble
By Susan Mathew
June 11 (Reuters) - Emerging market shares ended their longest winning streak in more than a year on Thursday after the U.S. Federal Reserve painted a dour picture for economic recovery from a pandemic-induced slump.
Following a weak finish on Wall Street, MSCI’s index of EM shares slid 1.2% - having gained almost 9% over the previous nine sessions. Safe haven demand for the dollar pushed the EM currency counterpart off three-month highs.
Asian heavyweights suffered, with China blue chips slipping 1%, while Hong Kong, Taiwan and South Korea shares gave up between 0.9% and 2.2%. The Chinese yuan weakened 0.1% while the South Korean won slipped from three-month highs.
Data from Malaysia underscored the damage, with April factory output numbers recording a 32% year-on-year drop, nearly double the decline forecast by analysts.
Elsewhere, sliding oil prices weighed on producer Russia’s rouble, while shares fell 1%. Commodity giant South Africa’s rand retreated from near three-month highs and stocks fell 2.4%, on course for the biggest percentage drop in three weeks.
The Fed brought focus back to the damage still being wrought by the measures to contain the novel coronavirus disease, saying impacts will be felt for years. It promised to keep pumping liquidity into markets, but expects the U.S. economy to shrink 6.5% this year.
A possibility of a fresh rise in U.S. coronavirus cases also dampened risk appetite, with a Reuters analysis showing infections rose slightly after five weeks of declines, partly due to more testing.
Together, they ended a risk rally that had helped emerging market assets recover significantly from year lows hit in March.
Bumper monetary and fiscal stimulus and easing restrictions to allow more business activity had spurred the rally, bolstered further by improvement in some economic indicators that raised hopes for a sooner-than-expected economic recovery.
“Markets might just be showing how dependent they are on incremental policy easing,” said Robert Carnell, regional head of research, Asia-Pacific, at ING. “Simply remaining ultra-loose may not be enough any more, especially when a V-shaped economic or corporate earnings recovery seems an unrealistic dream.”
Analysts at OCBC Bank said that, given the predictions for global growth by the World Bank and the OECD and with a second wave of infections potentially pushing the recession deeper, the Fed’s caution was not surprising.
Emerging central and eastern European currencies slipped against a steady euro.
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For RUSSIAN market report, see (Reporting by Susan Mathew in Bengaluru; Editing by Alex Richardson)