Feb 1, 2023
Risk-Hungry Investors See Powell’s Nod as Green Light for Emerging Markets Rally
(Bloomberg) -- Emerging markets lit up green as Federal Reserve Chair Jerome Powell nodded at the progress made against US inflation, adding fuel to Wall Street’s bullish outlook on developing assets.
MSCI Inc.’s emerging-market currency benchmark soared to the highest since April on Thursday, extending gains after Powell hinted that the Fed may have only a few more interest-rate hikes to go. A similar gauge of developing-economy equities also jumped, bringing its year-to-date gain to 10%. The won led the advance among Asian currencies with a rise of as much as 1.2%.
Investors and analysts have been broadly bullish on emerging markets this year, partially due to the odds that major central banks — including the Fed — will back off their aggressive tightening paths.
“The market is hopeful that the Fed isn’t going to overdo it,” said Aaron Gifford, an emerging-market sovereign-debt strategist at T. Rowe Price in Baltimore. “With the end of the US tightening cycle getting closer, China reopening and a softer slowdown in Europe, it’s hard not to be optimistic on risk markets — including EM.”
Optimism was especially visible across emerging currency markets as the US dollar slipped. The South African rand, which is often seen as a proxy for risk sentiment, jumped more than 2% to lead gains as 19 of the 23 developing currencies tracked by Bloomberg rose Wednesday.
The Mexican peso climbed more than 1%, flirting with the 2023 high reached in mid-January. Even Brazil’s real advanced ahead of the nation’s own central-bank decision.
“This more dovish commentary is supporting EM equities and EMFX,” said Brendan McKenna, an emerging-markets economist and FX strategist at Wells Fargo in New York. “Expect this trend to continue to the point where EM FX is the asset class that outperforms in 2023.”
--With assistance from Zijia Song and Marcus Wong.
(Updates with Asia currency moves in paragraph two.)
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