Stocks and currencies in emerging economies saw modest gains on Monday, as financial markets held onto strong expectations for an interest rate reduction by the U.S. Federal Reserve in December. The positive sentiment was further bolstered by news that President Donald Trump has decided on his nominee for the next Fed chair.
Markets Respond to Fed and Political Cues
The MSCI index tracking developing-market currencies climbed by as much as 0.1%, while a similar gauge for equities added 0.2%. The uptick was led by significant Asian tech giants, with shares of Alibaba Group Holding Ltd. and Tencent Holdings Ltd. posting notable gains. In contrast, the cryptocurrency market experienced a sharp decline, with traders preparing for potentially larger losses.
Traders are maintaining their bets for a Fed rate cut this month, even as they await a series of crucial U.S. economic data points for clearer direction. This week's releases include initial jobless claims and headline industrial output figures. The market's conviction was underscored by comments from Barclays Bank Plc analysts, including Themistoklis Fiotakis, who noted, "The end of the US data hiatus has solidified expectations for another rate cut in December, despite the FOMC’s increasing uneasiness about inflation persistence."
Trump's Fed Chair Decision Supports Risk Assets
A key development supporting risk sentiment was President Trump's announcement on Sunday that he has selected his candidate for the next Federal Reserve chair. Kevin Hassett, Trump's chief economic adviser, is widely considered the frontrunner for the position. The President has made it clear that he expects his nominee to implement interest-rate cuts, a stance that is viewed favorably by emerging-market investors.
This political development, combined with the rate cut expectations, provided a supportive backdrop for assets from developing nations. The Bloomberg dollar index held steady after recording its worst weekly performance since the end of June. Analysts pointed out that the broader environment is conducive to positive risk sentiment, leading to a continued decline in cross-market volatility.
A Strong Finish to a Banner Year
Emerging market assets are poised to conclude an exceptionally strong year, with December historically being a robust period for stocks, currencies, and debt instruments. An interesting shift in global investment trends is also underway. Strong performance by bonds from the developing world, coupled with growing concerns about fiscal stability in developed markets, has prompted some global debt investors to start viewing select emerging markets as a safer haven.
This evolving perspective suggests that the inflows into emerging market debt could have longer-term staying power, extending beyond the immediate catalyst of anticipated U.S. monetary policy easing.
