Emerging markets experienced their most impressive week since July, as growing speculation that the Federal Reserve will maintain interest rates at their current levels through the end of the year sent shockwaves through the global financial landscape. Investors, concerned about potential rate hikes, had been cautious in previous weeks, but a slowdown in the US labor market has led to a reconsideration of these expectations. Emerging market equities rose by 3.1% over the course of the week, regaining momentum after two weeks of declines. The currencies of these nations also strengthened, posting a weekly gain of 0.9%.
Both the stock and currency indexes continued to rise on Friday following a decrease in the number of jobs added in the US, which supported the idea that the Federal Reserve may conclude its current series of interest rate increases. The US dollar saw a decline for the third consecutive day, while US 10-year bond yields mostly held their ground after a drop on Thursday.
Juan Perez, Director of Trading at Monex USA, noted that the labor market, which had been a symbol of resilience, appears to be losing its momentum. “If employment continues to decline, we might begin to observe a transition from inflation to deflationary pressures,” Perez commented.
Mexican stocks posted a 3% gain on Friday, marking their most significant increase since November of the previous year. The Mexican peso also strengthened, capping off its most successful week since June 2021.
Among emerging market currencies, the Colombian peso emerged as the best performer, followed by the Hungarian forint and the South Korean won. This marks a significant turnaround for South Korea’s currency, which had fallen to its lowest level since November 2022 the previous month. The hawkish bets on the Federal Reserve’s actions had led to three months of consecutive equity outflows through October.
Greg Lesko, Managing Director at Deltec Asset Management LLC in New York, emphasized the importance of upcoming earnings reports in shaping the trajectory of the market. “The data this week and the subsequent reduction in rates are beneficial for emerging markets, as long as the data doesn’t weaken excessively,” Lesko explained.
The Israeli shekel had a remarkable week, gaining 3.9% in value. It strengthened beyond the exchange rate of 4 against the US dollar and is on track for its most substantial advance since July. Israel’s central bank is closely monitoring the situation and working to prevent excessive fluctuations in the currency’s value. US Secretary of State Antony Blinken arrived in Tel Aviv for talks, expressing Washington’s determination to prevent any further escalation in the ongoing conflict with Hamas.
In Africa, Nigeria’s naira saw a significant jump against the US dollar in the parallel market and on crypto exchanges. This surge came after authorities announced measures to clear a backlog of matured foreign-currency forward contracts that had previously hindered dollar inflows.
While concerns over the Federal Reserve’s rate hikes continuing into 2024 have weighed on market sentiment in recent months, these concerns have begun to ease. Investors are now looking for more evidence of a definitive peak in US interest rates before becoming bullish on emerging markets, according to Henrik Gullberg, a macroeconomist at Coex Partners Ltd.
Gullberg posed the question, “Is the worst behind us?” If the answer is affirmative, the market may begin to factor in a global economic recovery, which would bode well for emerging markets.
