Emerging Stocks, Currencies Diverge as Markets Price Fed Easing

The benchmark indexes for emerging-market equities and currencies, respectively, moved in opposite directions Monday, deepening a trend that emerged last week, when their short-term correlation was interrupted for the first time in 21 years.

The MSCI Emerging Markets Index for stocks rose for the fourth time in five days, while its currency counterpart fell from a 28-month high as of 9:10 a.m. in London. The 20-day correlation between them hovered near zero after turning negative for the first time since 2003 on Thursday. A longer-term measure of their relationship, the 120-day correlation, was near the lowest level since early 2018.

Weakening correlations suggest investors see differing outlooks for emerging-market stocks and currencies. With the Federal Reserve seen starting its monetary easing next month, money managers are weighing the capacity of EM central banks to cut interest rates to boost growth, though EM currencies may gain from a higher rates spread with the US. EM stocks could benefit from increased risk appetite that lower US borrowing costs often bring, but conversely may also struggle with lower economic growth.