Emerging-market currencies faced a decline for the fifth consecutive session, as traders reassessed their expectations for a significant interest-rate cut by the Federal Reserve, driven by indications of a robust U.S. economy. The MSCI Inc. index for developing-nation currencies dropped by 0.2%, marking its longest losing streak since July. Notably, the Malaysian ringgit and Indonesian rupiah featured prominently among the poorly performing currencies in Bloomberg’s monitored basket. Concurrently, oil prices experienced an uptick, reflecting investor concerns over escalating tensions in the Middle East, which have implications for global economic stability.
In the wake of recently released stronger-than-expected U.S. employment data, market participants revised their outlook on the Federal Reserve’s policy easing trajectory. This led to a rise in U.S. Treasury 10-year yields, which surged above 4%, as traders scaled back predictions for a half-point interest rate cut by the central bank. According to Luis Estrada, an RBC Capital Markets strategist, this realignment in the expectations regarding U.S. monetary policy is expected to exert continued pressure on emerging-market foreign exchange (EMFX) currencies in the short term. Furthermore, bearish positions on the U.S. dollar are being unwound, with some investors opting to buy dollars as a hedge against their more optimistic assessments of emerging market interest rates.
Recent moves by JPMorgan Chase & Co. to downgrade their recommendations for emerging-market local-currency debt reflected broader concerns. The bank cited an unexpected surge in U.S. payrolls and uncertainties linked to the impending presidential election. This conservative stance follows a period where emerging market local bonds witnessed their most significant quarterly appreciation since 2020. While equity markets within the emerging-market framework experienced gains—driven largely by the performance of Asian semiconductor stocks—a subindex for Latin American equities struggled.
The trajectory of the emerging markets is being shaped in part by developments in China, where optimism surrounding government stimulus measures has led to substantial inflows into exchange-traded funds focused on Chinese equities. In this context, China’s top economic planner is set to hold a press briefing to unveil a suite of policies aimed at stimulating economic growth. Analysts, such as Nenad Dinic from Bank Julius Baer in Zurich, argue that the specifics of the proposed fiscal stimulus will be critical in assessing whether the rally in Chinese equities can be sustained or if it could turn out to be transient.
Meanwhile, the landscape for emerging-market stocks, particularly those excluding China, may continue to lag due to shifting capital flows favoring China. The potential for ongoing underperformance of EM ex-China stocks indicates a complex interplay of regional economic dynamics. Investors appear to be making tactical decisions amid these swirling market conditions, navigating the crosscurrents of local and global economic indicators and potential governmental interventions.
In credit markets, El Salvador’s bonds experienced notable gains following the government’s announcement of a tender offer for refinancing several debt instruments. Bonds maturing in 2050 saw increases, with prices up by as much as 2.8 cents on the dollar. This development highlights a proactive approach from the El Salvadoran government in managing its debt, and reflects broader trends among emerging markets as they adapt to evolving financial environments. The convergence of these market elements points to a complex future for emerging-market currencies and equity, influenced by both domestic policy decisions and international economic conditions.