(Bloomberg) -- Emerging-market assets closed the week higher as traders began to price in greater odds of a half-point interest rate cut by the Federal Reserve, fueling risk appetite across the globe.
The MSCI gauge tracking developing-world currencies rose 0.5% on Friday to cap off its seventh-straight week of gains. An index tracking stocks snapped a two-week losing streak amid a risk-on mood among investors.
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“The idea of a larger cut by the Fed is what driving sentiment today. High carry currencies are benefiting the most such as BRL and MXN,” said Marco Oviedo, senior Latin America strategist at XP Investimentos. “Lower US rates make higher EM rates more attractive. It’s a risk-reward issue.”
The Mexican peso and the Brazilian real led gains, with Latin American currencies getting a boost by a rally in commodity prices. Oil gained for the third-straight day and gold hit another all-time high.
Mexico’s currency, meanwhile, recorded its best weekly gain since June 2021, boosted by global factors and as traders looked past the approval of a controversial overhaul of the nation’s judicial system.
Treasury yields fell while the dollar weakened as investors remained split on the magnitude of the Fed’s anticipated pivot to monetary easing. The likelihood of a 50-basis-point move climbed to 40% on Friday, up from as low as 4% earlier in the week.
Next week will also feature meetings at the Bank of Japan and the Bank of England, as well as South Africa, Brazil and Turkey.
“Ahead of three key central bank meetings — BOE, the US Fed, the BOJ — market volatility in Asia FX and rates may temporarily be higher,” analysts at Societe Generale said in a note Friday.
Emerging stocks were boosted by Asian tech companies like Taiwan Semiconductor Manufacturing Company Ltd and Tencent Holdings Limited.
“Allocators are once again focusing in on emerging markets,” said Malcolm Dorson, senior portfolio manager at Global X Management. “Emerging markets have historically outperformed the S&P, the NASDAQ, and even US small caps following US rate cutting cycles, and investors across the board are under-exposed.”
Goldman Sachs named South Korea, South Africa and India as its preferred EM equity markets going into the start of interest-rate cuts by the Fed.
Elsewhere, India’s central bank governor signaled he’s in no hurry to cut interest rates despite recent softening in inflation in the world’s fastest-growing major economy.
Sri Lanka’s main opposition leader said he’ll reopen negotiations with the International Monetary Fund on its $3 billion loan if he wins next week’s presidential election to ease the financial burden on working class people. Sri Lanka’s private creditors and the country’s government officials are holding a third round of talks this week to agree on the restructuring of $12.6 billion in defaulted bonds, according to people familiar with the matter.
In Europe, Romania’s debt market shows signs of growing investor concern about the worsening fiscal stance, Erste Bank analysts warned.
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