EM stocks, bonds, FX surge as Fed worries ease

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It’s been a while since investors have shown emerging markets this much love.

EM assets surged across the board on Wednesday as the market shrugged off the widely expected quarter point interest rate hike by the US Federal Reserve and cheered instead the move by policymakers to stick to its forecasts for two more rate increases this year.

The JPMorgan Emerging Market Currency index jumped nearly 1.5 per cent, putting it on track for its best day in 13 months.

Within this, the Mexican peso and the Brazilian real were among the top gainers, rising 1.1 per cent and 0.9 per cent respectively.

Brazilian and Mexican stocks also clocked in big gains, with the Bovespa up 2.4 per cent and the IPC rising 0.8 per cent. The gains helped lift the benchmark MSCI Emerging Market index 1.2 per cent higher for the day and bolstered the index’s recent gains.

The prospect of higher US interest rates tend to rattle EM assets – in part by driving up the greenback and raising the costs for countries that have a lot of dollar-denominated debt and in part by drawing investors’ cash back into US assets at the expense of developing markets.

Ahead of today’s Fed decision, some interest rate hawks were predicting that the Fed could signal four rate hikes this year. Instead, the Fed’s so-called dot plot of interest rate projections is pointing to just two further rates rises this year, following Wednesday’s rise – a move that is helping to spark demand for higher yielding EM assets.

The rally is particularly pronounced in the bond market. Yield on Brazil’s 10 year government bond tumbled more than 20bps to 4.943 per cent, while Mexico’s 10 year paper dropped 14.4bps to 3.882 per cent.

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