Global Markets in Limbo as Fed Rate Cut Fails to Deliver
The recent interest rate cut by the Federal Reserve has failed to boost emerging markets, with investors instead opting for caution amid rising global risks. The Fed’s decision to lower interest rates by 50 basis points on September 18 was initially met with optimism, but strong US economic data and comments from presidential candidate Donald Trump have since revived fears of resurgent inflation.
Emerging Markets Left in the Lurch
Developing world assets have traded as if borrowing costs in the world’s largest economy will remain high, leaving emerging markets in limbo and headed for another span of underperformance. The potential return of Trump as US president and China’s inadequate stimulus measures have been cited as major concerns, with traders positioning defensively for an inflationary US economy and a deflationary Chinese one.
A False Start?
Some analysts believe that the Fed’s rate cut may have been a false start, with the strong US jobs data calling into question the idea of the beginning of a Fed cutting cycle. “We might have had a false start last month,” said Martin Bercetche, a hedge-fund manager at UK-based Frontier Road Ltd.
China’s Stimulus Measures Fail to Impress
Successive stimulus measures in China have failed to convince investors that they are enough to turn around the economy, leading to wild volatility in the country’s equity market. The EM equity benchmark, where China holds the biggest weighting, is up about 13% this year, trailing the S&P 500 Index, which is up 23%.
Investors Reassess Exposure
The bruises of the past month have forced investors to reassess their exposure, with many avoiding sweeping EM-wide bets. For the moment, the focus is on weathering the US election, with polls showing Trump is neck-and-neck with his Democratic rival Kamala Harris.
A Harris Win: The Only Scenario for EM Gains
According to Gam’s Paul McNamara, there’s only one scenario where the Fed-cut trades in emerging markets can begin to make money: a Harris win. Until then, investors will remain cautious, with rising geopolitical tensions, uncertainty over China’s efforts to rescue domestic consumption, and event risk leading up to the US presidential election sparking increased demands for a higher risk premium.
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