Emerging markets bounce back but will a hawkish Fed inflict more pain before long?
Nicholas Spiro says the sudden slide in the US dollar has eased the pressure on emerging markets, ending a lengthy losing streak, but it might not take much for the greenback to rise again
Since September 11, the MSCI Emerging Markets Index, a leading equity gauge for developing nations, has risen more than 4 per cent, having fallen into a bear market at the start of this month. Another benchmark gauge that tracks the performance of 25 emerging market currencies is up more than 1 per cent, following a 7.5 per cent drop since late March. Foreign investors, meanwhile, have started to move back into the asset class: the largest exchange-traded fund tracking hard-currency emerging market bonds just enjoyed its biggest daily inflow since June 2017, according to Bloomberg.
While sentiment towards developing economies remains fragile and could easily deteriorate again due to country-specific and external factors, the tentative recovery stems from the end of a four-month rally in the US dollar, which had put emerging markets (particularly those with large external financing requirements) under severe strain.
Since mid-August, the US Dollar Index – a gauge of its performance against a basket of other major currencies – has fallen 2.7 per cent, to its lowest level since early July.