Risk on shift to EME?

Emerging Markets underline positive shift in investor appetite for risk.

In recent notes I have touched on the re-emergence of a “risk-on” quality to the trading of equities, US Treasuries and currencies. Another glimpse into this shift in tone comes with a review of the performance posted last week by emerging markets. The broadest and most closely followed EM index is the MCSI Emerging Markets Index. The emerging nation economic measure rose 4.6% last week and is positive to the tune of 9.6% thus far in 2016 – despite all the gloom that seems to have framed much of the year. Additionally, that outperformance has come not only as a result of an unexpected rebound in US economic data that was initiated by June’s Employment Report and a lack of movement on rates by the Fed. Rather more importantly, China’s economic data has taken on an in-channel character of late. By “in-channel” I mean the economic slowdown that has dogged Chinese policy makers and markets for several years appears to have slowed rather precipitously in recent weeks/months and as a result has hit official target. In fact, China’s GDP “rose” 6.7% on a year-over year basis in the second quarter.

With Brexit in the rearview mirror, Federal Reserve interest rates off the table for the time being, energy costs contained, emerging markets catching a bid and US Treasury yields rebounding from historic lows – US equities have room to run. The path will be serpentine and data dependent but if earnings can continue to put a floor under valuations, we should continue to see prices tick higher into record territory.

Given the run-up in prices we were witness to last week and given the increasingly uncertain geo-political terrain that emerged this weekend in Turkey, I would not at all be surprised to see some reversion to the mean. In the event that does materialize, look for earnings, guidance and data to once again ignite some institutional buying and in the process lift equity prices as the week wears on. Follow my weekly analysis on market action on the GMAG blog.

flickr photo: GovernmentZA