The rate hike pause is key to capital inflows in emerging markets – further rate hikes will choke off investment
Sydney Maki and Maria Elena, 2/1/23, Bloomberg, “Risk-Hungry investors see Powell’s nod as green light for emerging markets rally,” https://www.bloomberg.com/news/articles/2023-02-01/risk-hungry-investors-see-powell-s-nod-as-green-light-for-emerging-markets-rally#xj4y7vzkg, mm
Emerging markets lit up green as Federal Reserve chairman Jerome Powell nodded at the progress made against US inflation, adding fuel to Wall Street’s bullish outlook on developing assets. MSCI’s emerging-market currency benchmark soared to the highest since April on Thursday, extending gains after Powell hinted that the Fed may have only a few more interest-rate increases to go. A similar gauge of developing-economy equities also jumped, bringing its year-to-date gain to 10 per cent. The won led the advance among Asian currencies with a rise of as much as 1.2 per cent. Investors and analysts have been broadly bullish on emerging markets this year, partially due to the odds that major central banks — including the Fed — will back off their aggressive tightening paths. “The market is hopeful that the Fed isn’t going to overdo it,” said Aaron Gifford, an emerging-market sovereign-debt strategist at T. Rowe Price. “With the end of the US tightening cycle getting closer, China reopening and a softer slowdown in Europe, it’s hard not to be optimistic on risk markets — including EM.”