The MSCI equity benchmark for developing nations dropped 0.3%, paring its monthly gain to around 6.5%, its best month since November of last year. A gauge for emerging-market
currencies ticked up 0.1% as gains in the Thai baht were offset by a drop in South Africa’s rand. Powell said the central bank will lower interest rates “over time,” while re emphasizing that the overall economy remains on solid footing, pushing swaps traders reined in their rate cut bets. That was set to keep the dollar strong and curb the appeal of higher-yielding emerging market currencies, said Juan Perez, director of trading at Monex USA. “The economy is not declining and it makes sense that Powell feels confident in it,” Perez said. “It’s not ideal for risk markets to hear this.”
Emerging-market assets have been supported by bets that the Fed will be able to keep cutting interest rates, lifting demand for higher-yielding assets, while guiding the US economy to a soft landing and avoiding a recession. MSCI’s emerging market FX index posted its best quarter this year with a 4% advance. Colombia’s central bank cut interest rates by an expected 50 basis points on Monday, ignoring President Gustavo Petro’s calls for an even bigger reduction. The country’s peso weakened before the decision, which came after the close of the local FX market. The bank’s board also elected Governor Leonardo Villar for a second four-year term, which may curb worries about political interference in monetary policy.
The currencies of Hungary and the Czech Republic were also among the weakest EM currencies on Monday in the wake of interest rate cuts by their central banks last week.
The decline in emerging-market stocks was led by blue-chip tech companies including Taiwan Semiconductor Manufacturing Company Ltd. and Samsung Electronics Co. Ltd. Contrasting with the losses, China’s CSI 300 Index jumped 8.5%, the most since 2008, entering a bull market as investors piled into stocks ahead of a week-long holiday. ETFs that buy Chinese stocks saw massive inflows last week after a wave of fresh stimulus measures in the Asian giant boosted confidence in the country’s battered stock market.
UBS strategists said there could be some room for further gains in Chinese equities due to light positioning. But UBS doubted that the announced stimulus would revive growth. “We believe these measures are insufficient to continue stimulating weak domestic demand, which requires much stronger fiscal support,” UBS wrote.
Meanwhile, the approaching US presidential election is muddling the outlook for emerging market stocks, JPMorgan strategists said in a note, seeing emerging assets as initial laggards in case of a potential Donald Trump victory. “We look to fade this rebound, for now, and would wait for the US elections event risk to pass, which could create a more sustained opportunity to add to EM” analysts including Mislav Matejka said in a note.
