For all the obvious negatives -- think surging oil prices, trade tensions and the U.S. Federal Reserve having possibly reached the limits of its dovishness -- emerging markets are keeping their heads above water.
While developing-nation currencies just weakened for the first time in three weeks, their implied volatility, at around 8.25%, remains below the past year’s average. The yield on emerging-market local-currency debt is within 10 basis points of the all-time low of 4.12% reached in August. And the MSCI Index of stocks isn’t far off its highest level in seven weeks.
“We maintain an optimistic outlook for emerging markets going into the next few months as global central bank accommodation overshadows concerns of slower global economic growth,” said Anders Faergemann, a senior portfolio manager at Pinebridge Investments in London. “The overall market has taken the oil shock, the Fed meeting and the repo market confusion in its stride, suggesting it would have to take an even bigger flare up in risk to unsettle financial markets.”
Some $933 million flowed into emerging-market debt-dedicated funds in the week through Sept. 18, compared with $443 million the previous week, according to Morgan Stanley. Central banks in Egypt, the Philippines and Mexico will probably cut interest rates this week as policy makers around the world look to boost their economies.
U.S.-China trade tensions appear to be on the mend for now after China’s Ministry of Commerce signaled that both sides held “constructive” talks in Washington last week, though not everyone is buying into that narrative. Sentiment was also buoyed after Chinese officials emphasized that the cancellation of a planned visit to farms in the U.S. had nothing to do with trade talks.
Oil prices may continue to be volatile too, after the U.S. sent more troops and weapons to Saudi Arabia and Iranian Foreign Minister Mohammad Javad Zarif refused to rule out a military conflict. Oil importers with current-account and fiscal deficits -- including India and South Africa -- remain vulnerable to a further jump in energy prices. - Bloomberg-