Emerging markets get that Goldilocks feel as risk-buying returns

The year may be little more than a week old, but emerging markets are already feeling good about 2019.

Developing-nation assets roared ahead on Monday, continuing Friday’s theme, as traders took their cue from China’s move last week to release more cash into the financial system and speculation that the Federal Reserve will pause interest-rate increases this year.

Indonesia’s rupiah at one point registered its biggest gain since 2015, driving the MSCI EM Currency Index to its highest level since July, while a gauge of stocks clocked up its best two-day advance in two months. Russian and Nigerian dollar bonds were among the biggest winners in the debt markets as oil rallied a sixth day.

“The Goldilocks scenario turned to tatters during 2018,” Piotr Matys, an emerging-market foreign-exchange strategist at Rabobank in London, wrote in a report Monday. “However, it seems that this expression has been dusted off from the lexicon of financial markets following comments from Fed Chairman Jerome Powell on Friday, who gave severely battered investors what they wanted to hear.”

Powell said Friday policy makers are “listening carefully” to markets, denting the dollar and boosting the allure of riskier investments. The global economic outlook also received a boost from a better-than-expected US jobs report.

Meanwhile, the People’s Bank of China said it would lower the required reserve ratio for lenders by 1 percentage point, potentially releasing about $117 billion of liquidity.

While bears will point to how quickly the gains at the start of last year evaporated, bulls say developing-nations assets are close to a pivot point. Bank of America’s Bull & Bear Indicator, a gauge that told investors to sell right before emerging markets tanked a year ago, last week flashed its first buy signal for risky assets since the Brexit vote in June 2016. Citigroup upgraded developing-nation shares, calling them its "preferred value play," and BlackRock said attractive valuations offer a positive backdrop for the asset class.

Risk Premium

The largest emerging-market equity exchange-traded fund had its biggest gain in more than two months Friday, while the risk premium on sovereign debt narrowed by the most since November 2016, according to data compiled by JPMorgan Chase & Co.

True, two days of US-China trade talks starting Monday are hanging over markets, though Mitul Kotecha, a senior strategist at TD Securities in Singapore, says there are good reasons for both sides to want a breakthrough.

“Against the backdrop of market pressure in the US, the US will want to arrive at a deal, while China, faced with slowing growth, will similarly want to come away from the table with some success. This makes a deal of sorts more likely,” he said.