This February was not so exciting as during the January’s rally when global equities were surging with a euphoria, however, the financial markets managed to consolidate gains in the last month of winter, in terms of the best start of the year in the seven-year period. The first impression from the MSCI Emerging Markets index is that the current momentum is not so impressive as it would have seemed. But if you dug deeper, you would discover a number of advantages: global investors keep sending carry-trade flows into this type of assets, market players close bearish positions, while option markets had even accelerated the recent growth.
The risk appetite’s comeback to the traders’ sentiment traditionally underlines the growth of confidence that the United States will reach an agreement with China in order to stop the trade war, and that the Federal Reserve is getting closer to an end of the monetary policy tightening cycle. According to many forecasts, developing countries will grow two and a half times faster than developed countries in 2019, which makes the current cost of emerging markets assets comparatively low and attractive for long-term investments.
- MSCI shares index shows the best growth performance since 2012.
- Developing countries shares' overall capitalization increased by 1.1 trillion dollars, which was the best result in 13 months.
- The exchange fund iShares Core MSCI Emerging Markets ETF had noticed the record-high capital monthly inflow in the total volume of 4.2 billion US dollars, while its shares cost jumped to $59 billion.
- The number of companies included in the MSCI index, with the relative strength index above 70 reached the highest level on February 25, at least since 1995.
- The number of shares, which are currently trading above their 50-, 100- and 200-days moving averages, enlarged to record-high levels this month.
- According to CBOE EM ETF Volatility Index, options traders' bets on emerging markets shares volatility declined for the fourth month in a row, or the longest period since June 2014.
One of the fundamental reasons for that impressive growth is related to the carry-trade flow. The US Treasuries, the government debt and the fixed-income market were attractive for international investors in the third and fourth quarter of 2018, just because the market players were taking into the account a possible tightening by the US Federal Reserve. 10-year Treasuries yields were growing in a sustainable manner, attracting an additional flow of foreign investments into the greenback-nominated assets. However, the latest equities market’s reaction on further interest rates hikes by the regulator showed that traders are not satisfied with the tightening policy in conditions of an economic slowdown. US stock indices plunged in October, entering into a bear market for the first time since the last financial crisis in 2008, and eliminating all of the growth printed in 2018. But the Fed had to adjust its policy in relation to the markets’ reaction, as well as political pressure. The Fed Chairman Jerome Powell had announced a pause in the interest rates hikes, expressing even readiness to ease the financial conditions if needed. As a result, 10-year Treasuries yield slipped back down, lowering the attractiveness fo the US dollar, and forcing investors to find other sources of additional income. Emerging Markets became one of the alternatives after that.