(Bloomberg) -- Emerging-markets assets rose on Monday as traders geared up for the Federal Reserve to cut interest rates this week, a move that’s expected to unlock fresh inflows into risk markets.
An index that tracks developing nation currencies rose 0.2%, led higher by Brazil’s real, Hungary’s forint and Poland’s zloty. A companion index for stocks climbed 0.3%, with shares in Hong Kong and Taiwan leading gains.
The risk-on sentiment comes amid debate among bond traders as to whether the Fed will deliver a quarter- or half-point on Wednesday. Mounting speculation policymakers will decide on the larger of the two alternatives sent the dollar index to its weakest intraday level since January.
“As we begin a Fed week, much will depend on the sustainability of global risk appetite and any stronger response to the FOMC’s first cut,” BBVA strategists wrote in a Monday note. “Our base case is for a 25 basis point cut and limited dovishness in the revised forecast and Fed communication, which contrasts with the stronger easing path priced by markets.”
Brazil’s real strengthened some 1% against the greenback, leading its EM peers higher. The rally comes as traders expect policymakers led by Roberto Campos Neto to kick off a cycle of interest-rate hikes on Wednesday — a decision that is due just hours after the Fed’s and may improve the currency’s carry trade appeal.
Investors in Turkey, South Africa, Indonesia and Taiwan are also watching for monetary policy meetings this week. Economists expect a 25 basis-point rate cut in South Africa, while the other central banks are seen standing pat.
Bucking the trend, Colombia’s peso was one of the worst-performing currencies in the world amid rising political risks. Lawmakers will resume discussions of the country’s 2025 budget on Tuesday after failing to reach an agreement with the government last week to reduce the planned 523 trillion pesos of spending presented by Finance Minister Ricardo Bonilla.
Markets in China, Japan, Mexico and South Korea were closed on Monday for national holidays.
In credit markets, El Salvador’s sovereign bonds were among the best performers in emerging-markets after President Nayib Bukele said his 2025 budget wouldn’t include “a single cent of debt,” a move that could unlock a long-awaited program with the International Monetary Fund.
Croatia’s sovereign bonds also rose after the country won an upgrade by S&P Global Ratings to A- from BBB+. Notes from Petroleos del Peru soared after the government said it would take over the state-oil company’s remaining debt payments for the rest of this year.
Senegal’s dollar bonds, meanwhile, were some of the biggest laggards among their developing nation peers after the IMF said the African nation’s fiscal position was expected to deteriorate.
--With assistance from Colleen Goko.
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