According to analysts at Nordea Markets, emerging markets are currently at a crossroads with high geopolitical uncertainty and markets betting on a dovish move from the Federal Reserve. They favour a defensive stance towards emerging market.
“So far, 2019 has been a bumpy ride for emerging markets. The trade war along with the Fed's U-turn have been clear drivers of volatility in emerging markets. Looking into the second half of 2019, the question is whether these two factors can lead emerging markets towards sunnier skies. We remain sceptical. The market has currently priced in just below four Fed cuts over the next 12 months, leaving little room to positively surprise the market, which in turn could spur further optimism in emerging markets.”
“We still see dark clouds on the geopolitical front and for China's growth momentum. Overall, we find more conditions supporting a defensive view towards emerging markets.”
“Our model indicates that US financial conditions will tighten both in the short run and over the next 9-12 months, in line with previous Fed easing cycles and periods of slowing growth. This normally spells trouble for EM FX. This trouble can be exacerbated if the Fed, in fact, does not exercise its put option by delivering several cuts in a timely manner. In that case, financial conditions could tighten rapidly and act a toxic driver for EM FX, much like the situation in 2018.”
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