Emerging market stocks are having their best day in nearly a year as unexpectedly dovish comments from the Federal Reserve on the path of future rate rises helped boost appetite for the asset class.
The benchmark MSCI Emerging Market index jumped more than 2.3 per cent on Thursday — its biggest one day gain since last July — to hit a 20-month high of 965.67. The gains were powered by a 1.6 per cent advance in Mexico’s IPC stock index as well as rises in Asian and central European bourses.
After raising interest rates as expected by 25 basis points on Wednesday, the Fed confounded expectations that it could step up the pace of rate increases for the rest of the year by sticking to its December outlook for three rate rises in 2017.
Fed chair Janet Yellen also appeared to have eased concerns that the Trump administration’s proposed infrastructure spending programme could force the central bank to raise borrowing costs at a fast pace by insisting that monetary tightening would remain “gradual”.
“I think the trajectory that you see is the median in our projections, which this year looks to a total of three increases…that certainly qualifies as gradual,” she said yesterday.
“Emerging market equities in particular have tended to struggle when the dollar is strong, so another key test may face this asset class if the Fed keeps raising interest rates through 2017 and beyond,” said Russ Mould, investment director at AJ Bell.
“This explains why emerging markets are doing so well today, given the dollar weakness which has resulted from the Fed’s continued preference for careful baby steps rather than a sudden gallop higher in rates.”
EM currencies also clocked in another day of solid gains, with the Mexican peso strengthening to 19.05 per dollar — a level not seen since Donald Trump’s presidential victory. Commodity currencies such as the Colombian and Chilean peso and the Russian rouble all rose more than 1 per cent against the greenback. Elsewhere, the wider JPMorgan Emerging Markets Currency index tacked on 0.5 per cent, adding to its 1.3 per cent gain from Wednesday.