Emerging market equities have surged to a new all-time peak, with currencies also advancing, as global investors moved their attention away from geopolitical tensions linked to Venezuela and reinforced their positive outlook on the asset class.
Equities and Currencies Defy Dollar Strength
MSCI Inc.'s benchmark index for emerging-market stocks jumped 1.1%, driven notably by Chinese shares scaling multi-year highs. On Tuesday, a similar gauge tracking EM currencies managed to climb even as the US dollar strengthened. In a significant signal of confidence, a key measure of emerging-market bond risk fell to its lowest level in 13 years as of Monday.
Francesco Pesole, an analyst at ING Bank NV, observed that the market's reaction to events in Venezuela was short-lived. "The benefits to the dollar from the Venezuelan events lasted half a day, with focus shifting back to data and equities shrugging off geopolitical risk," he wrote in a note.
Data and Fed Outlook Take Center Stage
Investors are now keenly awaiting more economic indicators to gauge the Federal Reserve's future interest rate path, following an unexpected drop in the US ISM manufacturing gauge for December on Monday. Adding to the discourse, Fed Governor Stephen Miran stated on Tuesday that the US central bank would need to cut interest rates by more than one percentage point in 2026.
However, Thierry Wizman, global FX & rates strategist at Macquarie Group, emphasized the primacy of data. "The more important drivers of perceptions of the Fed outlook will come from the data, especially Friday’s employment report, where traders expect there to be little distortion from the government shutdown," he said.
Regional Highlights and Broader Bullish Sentiment
The Chilean peso emerged as a top performer among its peers, buoyed by extending rallies in copper prices. In a related development, President-elect José Antonio Kast informed business executives of his intention to nominate Jorge Quiroz as the country's finance minister.
In a dramatic move, prices for Venezuela's bonds soared on Monday. This surge occurred as a group of the nation's long-term creditors convened to discuss the potential implications of the US-led ouster of President Nicolas Maduro on recovering their investments.
The optimistic wave is sweeping across fixed income as well. Bond investors are exhibiting the highest level of optimism in 13 years towards emerging markets. This rally is fueled by growing confidence in fiscal discipline and capital moving away from the United States.
Raymond Sagayam, managing partner at Banque Pictet & Cie SA, expressed a strongly positive view. "The thesis for emerging markets is in my view stronger than ever," he stated in an interview on Bloomberg Television. Sagayam listed attractive valuations, the capacity for central banks to reduce interest rates, and participation in the artificial intelligence value chain as key reasons supporting this bullish outlook.
