Stocks, FX bounce after US Fed signals rate cuts ahead

By Niket Nishant and Johann M Cherian

Emerging market stocks and currencies shook off recent pessimism on Wednesday after U.S. Federal Reserve Chair Jerome Powell's remarks increased hopes of lower interest rates, offsetting concerns about renewed trade tensions between Washington and Beijing.

An MSCI index tracking emerging market equities CBOE:EFS climbed 1.9%, on course for its first gain after three straight sessions of losses. A similar gauge for currencies (.MIEM00000CUS) gained 0.5%, set to snap a six-day slide.

Dovish signals from the Fed generally reduce the appeal of the U.S. dollar DXY, which can ease pressure on emerging market currencies and make local assets more attractive to investors.

A weaker dollar also lowers borrowing costs for countries and companies with dollar-denominated debt, which is significant for many economies that rely on external financing.

The current economic backdrop could also yield carry trade strategies, where investors borrow cheaply in dollars and chase higher yields in emerging markets.

"There are good opportunities in carry trade and at least for the next half a year, the trend is optimistic," said Vladimir Miklashevsky, an independent Finnish analyst.

MIXED SIGNALS ACROSS MARKETS

Saudi Arabia's benchmark index TASI rose 0.3%. The International Monetary Fund upgraded its 2025 economic growth forecast for the country on Tuesday.

The South African rand USDZAR and the benchmark 2035 government bond (ZAR2035=) also strengthened, despite a warning from a Moody's analyst who said weak investment was hurting its credit rating prospects.

India's benchmark equity index, the Nifty 50 NIFTY, was up 0.8%, on track to snap a two-day losing streak.

While the rebound underscores how sensitive emerging markets remain to global monetary policy cues, gains may be uneven across countries.

Malaysia's stock index BURSA was flat. The government will hold talks with the U.S. secretary of commerce on sectoral tariffs, including on semiconductors, during a meeting of the ASEAN regional bloc next week, state media reported.

Turkey's main BIST 100 share index XU100 was flat on Wednesday, after closing lower in the last five trading sessions. The lira USDTRY was slightly weaker against the dollar.

Mainland China stocks traded higher, with the Shanghai Composite index 000001 up 1.2% as investors kept their hopes up for new monetary stimulus following data that showed deflationary pressures persisted due to prolonged property market downturn and trade tensions with the U.S.

Elsewhere, Pakistan's international bonds (XS2322321964=TE), (US695847AU73=TE) maturing in 2051 rose one cent on the dollar each after the IMF said it had reached a staff-level agreement with the south Asian country on its loan program, which would allow the country to access $1.2 billion after approval from the fund's board.