Emerging markets resumed their rally as the prospect of central bank rate cuts and optimism about earnings boosted risk sentiment.
The benchmark EM equity index added 0.6% in its second day of advances and clawed back last Friday’s losses when weak US data sparked a selloff. EM equities have posted returns every month this year with year-to-date gains approaching 16% amid inflows into the asset class.
Traders are increasingly pricing in Fed rate cuts after the jobs report, which dragged down stocks and sent bond prices higher. Money markets are pricing in a more-than-80% chance of a 25-basis-point Fed rate cut next month, and a one-in-three probability of another by year-end. Additionally, the rise in US corporate earnings signaled resilient global economic activity despite the threat of higher tariffs.
“A modest weakening of the economy would be good news as it should be more easing from the Fed,” said Mohit Kumar, chief economist at Jefferies International. “We are still in the bullish risky assets camp over the medium term. That said, we do see increased volatility in August as market positioning is still on the long side and technicals would start becoming less favorable.”
Electronics and tech companies in Asia led the gains with South Korean chipmaker SK Hynix Inc. rising 2.1% and Hong Kong-listed BYD Electronic International Co. gaining 8%.
In another source of upbeat sentiment, data showed China’s services activity unexpectedly accelerated in July to the fastest pace in over a year. That indicated resilience in the sector during the summer travel season.
In eastern Europe, Hungary’s BUX stock index was trading near a record level, with heavyweight OTP Bank Nyrt. rising to an all-time high after a jump in second-quarter earnings.
Things were less rosy in the currency market with the Indian rupee weakening 0.2% to near its record low. The rand also fell 0.6% as US President Donald Trump last week announced that imports from South Africa will be subjected to 30% duties — the highest in sub-Saharan Africa. He also said he would be “substantially raising” the tariff on Indian exports to the US over the Asian nation’s purchases of Russian oil.
“The greater market interest in the short term is President Trump’s newfound focus on India,” ING analysts including Chris Turner wrote in a note. “Here, the threat of secondary sanctions became more real yesterday as Washington squarely turned its attention to India’s purchases of Russian crude oil.”
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