Following an impressive US employment report last Friday, emerging-market assets experienced a downturn as investors adjusted their expectations regarding the Federal Reserve's interest rate cuts in the upcoming months.
US nonfarm payrolls surged by 303,000 in the most recent month, marking the most vigorous growth nearly in a year. This development led to a recalibration in Federal Reserve swap rates and an uptick in yields for 10-year Treasuries. Consequently, there was a diminished appetite for riskier investments, causing both emerging market stocks and currencies to end the session on a lower note.
Brad Bechtel, the global head of FX at Jefferies Financial Group Inc., commented on the situation, noting that the anticipation for rate reductions has been pushed further out, which is likely to sustain the strength of the USD.
Adding to the narrative, Federal Reserve Bank of Dallas President Lorie Logan and Fed Governor Michelle Bowman expressed that it's premature to consider easing borrowing costs, citing ongoing inflation risks and the resilience of the US economy.
The Chilean peso and the South Korean won were among the currencies that saw the most significant declines. In contrast, the Mexican peso (MXN) bucked the trend, showcasing remarkable gains against its peers on Friday and solidifying its position as the top performer globally.
Luis Hurtado, a currency strategist at CIBC in Toronto, explained that the robust performance of the US economy bodes well for the MXN. However, he cautioned that potential rate cuts in Mexico and the overextended positions might deter speculative interest in the currency.
On the equities front, the MSCI Inc.’s benchmark index for emerging market (EM) stocks dropped by 0.3%, trimming its weekly gains to approximately 0.2%. The decline was primarily due to a slump in health care stocks, with WuXi Biologics and other Chinese biotech firms facing losses in Hong Kong amidst concerns over the potential broader impact of the US’s Biosecure Act.
Geopolitical tensions in the Middle East further exacerbated the risk-averse mood among investors. Iran's confrontation with the US and Hezbollah's warnings to Israel have contributed to a climate of uncertainty and apprehension in the markets, according to Bjarne Schieldrop, an analyst at SEB Research.
