Source: Zhitong Finance and Economics
Emerging market equities and money markets gave a bullish green light as Federal Reserve Chairman Jerome Powell praised the progress made in the fight against inflation, adding strong momentum to Wall Street's bullish outlook for emerging market assets. Us stocks were the first to rebound after the Fed's latest interest rate decision and Mr Powell's speech, with the Nasdaq composite index rising 2 per cent to a new high in more than four months and the S & P 500 hitting a new high in more than five months.
The MSCI's main emerging market currency index soared to its highest level since April last year on Wednesday, and the Fed announced a further slowdown to 25 basis points as expected after a two-day interest rate meeting, extending its strong rally since January after Federal Reserve Chairman Powell hinted that the Fed might raise interest rates only one or two more times, Zhitong Financial APP learned. A similar index of stocks in developing economies has also risen sharply recently, bringing it to 9 per cent so far this year.
Most investors and analysts are generally bullish on emerging markets this year, in part because major central banks around the world, including the Federal Reserve, are likely to abandon the aggressive line of monetary tightening, and the Fed's suspension of interest rate hikes soon has been largely thoroughly confirmed. the current rate hike cycle is likely to end with only one or two rate hikes left. Fed chairman Powell's post-meeting speech was interpreted by the market as a "dove" message, Powell said, do not expect to announce interest rate cuts in 2023, but the federal funds rate is "certainly possible" to remain below 5%.
Aaron Gifford, emerging market sovereign debt strategist at T. Rowe Price in Baltimore, said: "the market hopes that the Fed's monetary policy will not go too far." "as the end of the US monetary tightening cycle approaches, the European economy is likely to avoid the recession expected by the market, and the Chinese economy reopens, it is hard not to treat risk markets, including emerging markets. Maintain a strong sense of optimism."
Optimism about emerging currency markets is particularly evident as the dollar index continues to fall. The South African rand, often seen as a barometer of risk sentiment, jumped more than 2 per cent on Wednesday, leading emerging market currencies higher. In addition, 19 of the 23 emerging market currencies tracked by Bloomberg rose yesterday, with the Mexican peso up more than 1 per cent, nearing the 2023 high hit in mid-January. Even the Brazilian real rose quickly before the central bank made a decision on interest rates.
Brendan McKenna, an emerging market economist and foreign exchange strategist at Wells Fargo & Co, said: "this statement, which is seen by the market as dovish, supports emerging market equities and emerging market currencies." "We expect this trend to continue into 2023, with emerging market currencies becoming the asset class that outperforms developed market currencies."
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