The final outcome of the US presidential poll could have a huge bearing on emerging markets (EMs). It could either usher in more foreign inflows or drive investors away. There are three key data points that investors should follow closely to gauge the sentiment towards EMs.
The first, and most important, being the US dollar. A stronger greenback will reduce the allure of developing-nation assets. Conversely, any weakening will bolster risk appetite. As seen during the year, weakness in the dollar and policy support from major central banks have helped most EMs rebound sharply from their lows in March.
The second data point is the US bond yield curve. A flatter US Treasury yield curve will be positive for emerging Asia capital flows. In other words, more the decline in yields on the longer-end bonds the better the sentiment towards riskier assets.
This is because the differential between the EM and US yields widen. Lastly, investors shouldalso keep track of Cboe Volatility Index (VIX), an indicator of near-term volatility. Any flare up in the VIX leads to turbulence.
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