Emerging markets react to Fed rate hike
Emerging markets react to Fed rate hike - From Russell Investments
In this week’s video update:
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The U.S. Federal Reserve (the Fed) reveals slow rate hike plans for the remainder of 2017. S. 10-year Treasury yields down from 2.6% to 2.5%, strengthening emerging markets. A look at how economic populism and upcoming European elections could affect markets this year.
In this week’s episode of Market Week in Review, Investment Strategist Paul Eitelman is joined by Rob Cittadini, regional director, consultant relations.
Getting straight to the big economic news of the week, Eitelman discusses the Fed’s March 15 rate hike announcement. He notes that markets were largely ready for this week’s third interest rate hike since December 2015 in this most recent economic expansion.
A slower pace for future Fed rate hikes?
Related to the hike, many investors were focused on the press conference and language afterwards regarding Fed guidance for future potential rate hikes. There was a concern by some in the markets that additional rate hikes would begin happening perhaps too often or quickly in the coming months and years.
However, both Fed Chair Janet Yellen and other committee members reiterated that they plan for rate hikes to be gradual and not overly aggressive. Yellen stuck to earlier projections of three rate hikes in 2017 and three more in 2018. This news seemed to help markets breathe a sigh of relief for the near future regarding the rate hike pace.
Global reaction to Fed rate hikes: Emerging markets potential starts to shine
Looking at the potentially global implications of this news, Eitelman notes that U.S. 10-Year Treasury yield fell from 2.6% to 2.5% this week. This move in the yields has strong global market implications, especially for emerging markets (EM).
In fact, in part due to this monetary policy, EM strongly out performed expectations this week with the MSCI Emerging Markets Index up close to 4% this week compared to just 0.4% for the U.S. large-cap S&P 500® Index.
Eitelman notes that the firm’s team of investment strategists has been focused on EM recently as a potential opportunity, as valuations are significantly cheaper along with improving fundamentals in terms of both economic and earnings growth. The Fed decision this week seems to have helped to unlock some of that potential for investors in the EM sector.
What markets are watching for in upcoming European elections
Noting that last year saw a shift towards economic populism in the UK (Brexit vote) and the U.S. elections (Trump win), Eitelman discusses the concern of government and monetary policy for European markets facing elections this year.
The Dutch general election results may indicate a turn in such economic populism, as the outcome effectively rejected the populist candidate. This shift has made many in the markets optimistic for the eurozone’s future potential growth.
There are more elections to come in Europe however, with French presidential elections starting in late April and early May. The Dutch outcome could signal similar results in France and this could unlock some potential upside in European equities later this year. That said, Eitelman believes there is still a real risk in European markets for investors until election results are clear. Still, if European elections do shift away from economic populism throughout this year, there may be more potential upside for European markets, due to strong fundamentals.