The MSCI index of EM stocks is on track to close at the highest since January of last year. Chinese stocks listed in Hong Kong climbed after a slew of positive data convinced investors the world’s second-biggest economy is on the mend. Taiwan’s benchmark index hit another record, led by Taiwan Semiconductor Manufacturing Co. after legendary EM investor Mark Mobius touted the company as a “winner.”
Developing nation currencies pared earlier declines triggered by yesterday’s US factory data, which showed expansion for the first time since September 2022. The currencies are being weakened by dollar strength as yields on US Treasury debt maturing in five to 30 years climbed to the highest levels this year. The MSCI gauge is now at the lowest After spending most of this year making bets that were more dovish than the stance delivered by Fed officials, investors have flipped, and are no longer pricing in three quarter-point cuts in 2024. Traders are now forecasting rate cuts that are below the median estimate of projections released following the Fed’s March 19-20 meeting.
“It’s a reality facing LatAm, EM, as well as other major central banks — central bank policy divergence may once again be a boost to dollar strengthening,” said Juan Perez, Juan Perez, director of trading at Monex USA.
As such, the benchmark index for developing-nation currencies on Tuesday is on track to post its 12th loss in the past 16 days. That’s left the gauge below its 100-day moving average.
“The reality EM local-market investors must contend with is simply that the asset class offers little to no carry at the index level, while the US dollar is the highest-yielding currency in the G10,” Morgan Stanley strategists including James K. Lord wrote in a note. “It’s not obvious why the asset class should receive significant inflows from investors seeking to take advantage of low volatility when the asset class offers little yield pick-up.”
Meanwhile, the MSCI Emerging Markets Index, which measures EM equity returns in dollar terms, is up 2.5% so far this year. That’s below the local-market gains in most of its biggest countries — China, South Korea, Taiwan and Saudi Arabia, which account for 60% of the index by weight. The gauge missed that upside because the countries that make up the remaining 40%, such as Brazil, are underperforming due to pressure on their currencies.
The Turkish lira advanced for a second day after President Recep Tayyip Erdogan pledged to continue orthodox policies despite election losses, soothing investors’ nerves.
Markets are keeping a close eye on geopolitical developments. An Israeli airstrike on Iran’s embassy in Syria sent gold prices surging to a record high. Oil also rallied, rising above $85, as the attack added risk premium to a market that was already tight.
On Thursday, Mexico’s central bank will issue minutes from its latest meeting, when it cut rates for the first time since 2021. Investors will be looking for signs of whether Banxico could continue cutting, which could undermine the peso, or potentially pause at its next decision.
