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Emerging-Market Assets Gain in Broad Rally as Fed Cuts Rates

Donald Trump, left, and Melania Trump on Nov. 6. (Eva Marie Uzcategui/Bloomberg)

(Bloomberg) -- Emerging-market assets shook off a post-election selloff, following the broader market higher on Thursday as the Federal Reserve stuck to a widely expected quarter percentage point interest rate cut. 

MSCI’s index for emerging currencies rose 0.2%, lifted by big gains from the Colombian peso and the Hungarian forint. A gauge tracking developing world stocks rallied further after the rate decision and closed 0.8% higher. 

The moves were part of a wider rally across assets a day after Donald Trump’s election victory, with US stocks, bonds and commodities climbing.  

The US central bank lowered the federal funds rate to a range of 4.5% to 4.75%. The adjustment follows a half-point cut in September. Policymakers removed a line about having “greater confidence” that inflation is moving sustainably toward 2%, though they noted inflation has “made progress” toward the central bank’s goal.

Fed Chair Jerome Powell said after the decision that the US economy remains strong.

“Powell expressed a lot of confidence in the economy and in current monetary policy,” said Brad Bechtel, global head of FX at Jefferies LLC. “He indicated that it is far too early to input any new policies from the new administration into their forecast models, so no read through from the election. A very middle of the road rate decision that is unlikely to have any major impact on markets near term.”

Mexico’s currency, which is sensitive to US economic and political risks given the country’s close trade links, also held onto gains, rising 1.4% against the dollar. Latin American currencies were among the biggest gainers given their carry-trade appeal, while also getting a boost from rising commodity prices.

The Colombian peso rose as much as 2.3%. The Brazilian real gained briefly before falling 0.2% against the greenback.

“Latam is still associated with the strongest carry appeal,” said Brendan McKenna, a strategist at Wells Fargo & Co. in New York. “These currencies have been beaten up a little bit recently, so entry points and a combination for carry makes them a bit more attractive.”

Equities across emerging markets rallied, ending the day 0.8% higher. The index is boosted by gains in Asian stocks like Meituan, Tencent Holdings and Taiwan Semiconductor Manufacturing Co. Optimism that China could deploy a larger fiscal stimulus in light of a new Trump administration is also boosting emerging-market assets. 

While Trump’s victory has stirred up tariff threats for China and other developing economies, hopes are high that China will announce measures to offset the impact of potential US trade levies. Measures could come as soon as Friday when a Chinese legislative meeting wraps up.

“To mitigate rising US tariffs on the economy, we believe Beijing would likely scale-up fiscal stimulus,” Morgan Stanley strategists including Robin Xing told clients.

Among central bank decisions across emerging markets, Czech policymakers delivered an eighth-consecutive rate cut as weak economic growth eclipsed concerns about inflationary risks. Peruvian rate setters are expected to trim borrowing costs by a quarter point to 5% later in the day. 

--With assistance from Giovanna Bellotti Azevedo, Mpho Hlakudi, Colleen Goko, Philip Sanders and Sujata Rao.

©2024 Bloomberg L.P.