Developing-nation assets roared back Friday after Federal Reserve Chairman Jerome Powell said policymakers are “listening carefully” to markets, denting the dollar and boosting the allure of riskier investments. Leading the charge among currencies was the Turkish lira, one of last year’s biggest losers. It posted its best one-day gain against the greenback since October and every major emerging-market currencies advanced. The global economic outlook also received a boost from a better-than-expected US jobs report.
While a one-day rally may well be just that, 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, just flashed its first buy signal for risky assets since the Brexit vote in June 2016. Meanwhile, Citigroup Inc. upgraded developing-nation shares, calling them its "preferred value play," and BlackRock said attractive valuations offer a positive backdrop for the asset class.
“You have Fed pricing that’s very non-threatening, you have the US economy doing quite well despite some of the hyperventilation about where it’s going,” said Ilya Gofshteyn, a strategist at Standard Chartered in New York. He expects the lira and other 2018 stragglers such as the Argentine peso, South African rand and Russian ruble to climb in the first quarter.
It wasn’t just currencies. The largest emerging-market equity exchange-traded fund had its biggest gain in more than two months, while the risk premium on sovereign debt narrowed by the most since November 2016, according to data compiled by JPMorgan Chase & Co.
Helping underpin the rally was optimism ahead of next week’s meeting between U.S. and Chinese delegations on resolving trade disputes that have rattled global markets. In addition, the People’s Bank of China said it will trim its reserve requirement ratio by 1 percentage point, releasing about $116 billion of liquidity. The attempt to shore up the nation’s slowing economy will feed into broad emerging-market strength, according to Frances Donald, the head of macro strategy at Manulife Asset Management in Toronto.
“Meaningful policy easing from Beijing that could support a bottoming-out in Chinese growth has been the missing key ingredient for the EM complex,” she said.
For now, 2019 is looking pretty upbeat for the developing world.
Friday “will best be remembered for being a big risk-positive day,” said Alan Ruskin, chief international strategist at Deutsche Bank AG.