n.b. Check out the full archives of the Chart Of The Week for more charts.
Chart of the Week - Emerging Markets Inflection Point
EM Assets: Something happened last week. Yes there was the FOMC, which extended the Fed pause to now 4 months of no change (after over 500bps of hikes across 17 months). And yes there was also the weak payrolls figure for October. And yes there was also an overall easing of financial conditions as markets reacted…
But looking at the price action in emerging market assets (stocks, bonds, FX), and yes it’s just a couple of days of price action… I have to say — it sure looks like the market has made its mind up: the Fed is done.
And for emerging markets, while yes: there is a strong valuation case for all 3 of EM bonds, EM equities, and EMFX… and yes there is extreme pessimism on EM (big outflows, light allocations, general bearishness), and yes there is the fact that EM central banks as a group have begun to clearly pivot toward rate cuts…
But realistically, the key catalyst for Emerging Markets? It’s going to be the Fed. When the market makes its mind up that the Fed is done hiking, that’s probably going to be (outside of China’s dribble of stimulus) the strongest possible upside catalyst for EM assets.
And perhaps the biggest reason to believe that this could be *the* inflection point for EM, is the belief in belief itself. The market almost inexplicably turned on a dime in October 2022 despite a litany of reasons why it “shouldn’t“ have, just on the mere whiff of inflation peaking.
My sense is market psychology has sort of changed a bit after 2020, it’s more sporadic, haphazard, and hyperactive. If the crowd truly decides that the Fed is done (and if the Fed does nothing to walk that back), you could easily see a stampede into emerging market assets as every strategist’s favorite trade finally works.
n.b. the chart below shows the equal-weighted price for EM equities + government bonds in local currency terms, along with an equal-weighted basket of EM currencies vs USD. The breadth indicator tracks 50 and 200 day moving average breadth across the countries that comprise those price indexes (so this one chart provides a broad-based true perspective on strength and weakness across emerging market assets).
Key point: The price action in EM assets has all the hallmarks of an inflection point.
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Aside from the chart above, we looked at several other charts, and dug into some intriguing global macro & asset allocation issues on our radar:
Market Update: post-Fed post-mortem across global markets
Emerging Markets: an in-depth look at EM technicals (equities, bonds, FX)
Macro/Market Radar: key things to pay attention to for the week ahead
Ideas Inventory: latest look at the list of our open ideas/macro views
Monthly Asset Allocation Review: link to the latest monthly pack ICYMI
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