The MSCI Emerging Markets Index and a similar gauge for developing nation currencies pared earlier advances, with the latter briefly erasing gains as data showed the US labor market unexpectedly strengthened in November, with pickups in employment and wages.
“Very strong labor means that the Fed can be aided in dissipating expectations of cuts,” said Juan Perez, director of trading at Monex USA. “The upcoming year will be characterized by moderation and that short-term may mean a strengthening dollar over EM.”
The strong payrolls report drove Treasury yields up, with traders paring bets for the Fed to ease monetary policy aggressively next year. Higher yields and a hawkish Fed would be detrimental for riskier assets.
The benchmark MSCI equity index traded 0.3% after adding as much as 0.7% earlier, paring this week’s losses as China’s Politburo vowed to strengthen the government’s fiscal policy to boost domestic demand in the world’s second-biggest economy. Chinese airlines and tourism companies including Air China and Trip.com rose after China and the EU agreed to accelerate the resumption of flights and personnel exchanges. Chinese AI companies also gained as the launch of Google’s Gemini software boosted sentiment.
The rally in high-yield emerging-market credit, meanwhile, has continued with year-to-date total returns testing double- digit levels. Some sovereigns including Egypt and Angola have seen their dollar bond spreads retreat below 1,000 basis points over the US Treasuries, the threshold above which investors consider debt to be in distress.
In Hungary, the government renewed pressure on the central bank to cut interest rates after inflation declined for a 10th straight month, with the economy minister saying high rates were impeding growth and investments. Citigroup analysts said they’d take profits on a recommendation to buy 5-year Hungarian forint bonds against US Treasuries before the US jobs data, as “any hawkish surprise on the NFP front could mean tactically higher rates” across the region.
The Hungarian forint is down 1.8% against the dollar over the past five days, the worst performance among major emerging- market currencies. Only four developing-nation currencies — in Taiwan, Malaysia, Philippines, and Hong Kong — have gained over the period.
In Latin America, the Mexican peso extended gains after the payrolls data. Several of the region’s markets, including Chile and Colombia, were closed for local holidays on Friday.
“The drop in the unemployment rate is overall positive for the Mexican economy through its impact on remittances,” Luis Hurtado, a currency strategist at CIBC in Toronto. “However, I am unsure we will see a prolonged MXN rally as Mexico will likely pave the road for rate cuts as soon as February in next week’s rate announcement.”
