EMs surge amid speculation of dovish Fed

by Kelsey Butler, Maria Elena Vizcaino and Raphael Almeida

Emerging-market assets surged across the board Thursday, after a fresh batch of US jobs data strengthened expectations for a more dovish Federal Reserve, weighing on the dollar.

MSCI’s EM stock gauge rose 0.9%, bringing its advance this week to 2.2% and reaching its highest level since October. An index of developing-nation currencies rose 0.2%, led by the Brazilian real which outperformed its peers.

“We are in the middle of this risk rally,” said Ning Sung, a strategist at State Street Global Markets.

The greenback sank earlier in the day following reports that US President Donald Trump and Chinese President Xi Jinping spoke, then retraced some losses as more details emerged. The currency still ended the day down 0.1%. The two leaders agreed to further trade talks and Trump said they cleared up disputes surrounding rare earth exports, a central ingredient to the tensions between the world’s two largest economies. 

“The details of the call give markets some hope that there could be a deal soon,” said Marco Oviedo, a strategist at XP Investimentos.“So the USD recovered, but it seems that did not affect the EM, given that it is also positive for these economies.” 

Looking ahead, JPMorgan Chase & Co. strategists on Thursday upgraded their outlook on emerging-market currencies to overweight, stating that the impact of the ongoing trade war will hit the US more than developing economies in the second half of the year, helping the latter to continue performing.

“This questioning of US exceptionalism was not our assumption coming into the year and we missed out on much of the strong EM local markets performance,” the strategists wrote.

Colombia’s sovereign dollar bonds dropped across the curve on Thursday after local media reported that the government might suspend the fiscal rule that limited budget spending and helped steady the markets for more than a decade.

W Radio reported that the government’s fiscal committee was discussing whether to apply the escape clause that allows the government to suspend the rule, supposedly under extraordinary circumstances. The committee will announce a new fiscal plan next week.

Elsewhere, Israel’s bonds and stocks rose as markets began factoring in that Prime Minister Benjamin Netanyahu’s government was at risk of collapse, an outcome that some traders view as a positive for the economy.

Peru is selling new global bonds denominated in its local currency for the first time in almost a year. At the same time, the country is offering to repurchase notes due in 2026, 2028, 2029 and 2031 for cash.

Copyright Bloomberg News