The trading week commenced in Asia with a renewed sense of optimism among investors, buoyed by last week’s recovery in risk appetite. The potential for a “soft landing” in the U.S. economy has once again come into focus, a scenario that is particularly encouraging for Asian and emerging markets.
Emerging market equities experienced their most significant weekly gain since April, while global stocks had their best performance since October. The Nasdaq and S&P indices also marked their strongest week since October, and Wall Street’s volatility index, the VIX, dropped below 15.0, indicating reduced market anxiety.
Chinese stocks managed to break a three-week losing streak, rebounding from a six-month low with a modest 0.4% increase. Although this rise is small, it signals a positive shift for China’s market enthusiasts and policymakers. However, China’s economic data remains underwhelming, consistently falling short of already dimmed expectations. The economic surprises index for China, which has been negative since June, reached its lowest point in nearly a year last week.
Similarly, U.S. economic data has been lacklustre, but there are emerging signs of stabilisation. Investor expectations have moderated, with fewer bets on a significant rate cut by the Federal Reserve next month. The likelihood of a 50-basis point cut has been reduced to around 25%, as the financial turbulence from earlier this month has subsided. Should recession fears diminish further, riskier assets like stocks and emerging markets stand to gain.
The recent strong performances of U.S. megacap stocks are likely to bolster Asian assets linked to American tech giants. For instance, Nvidia’s shares have surged 37% since their low on 5 August, suggesting that Taiwan’s TSMC and the Hang Seng tech index could see further gains this week.
On Monday, the Asian economic and policy calendar is relatively quiet, with Japanese machinery orders, Malaysian trade figures, and Thai GDP data being the main points of interest. Meanwhile, recent data from the U.S. Commodity Futures Trading Commission revealed that currency speculators are now long on the Japanese yen for the first time since March 2021. Since July, the yen has appreciated by around 10% as traders unwound one of their largest short positions in history, driven by Tokyo’s interventions, a rate hike from the Bank of Japan, and a wave of safe-haven buying following global market volatility earlier this month.
However, the resurgence of risk-on sentiment that swept through global markets last week slowed the yen’s momentum, with the dollar/yen exchange rate rising by 0.7%—a modest increase by recent standards but the largest since June.
As the market’s outlook brightens, emerging markets are poised to benefit from a more optimistic global economic scenario, with Asian assets particularly well-positioned for gains amid stabilising conditions in the U.S. and a rebound in risk appetite.
Fidelity Emerging Markets Limited (LON:FEML) is an investment trust that aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging markets companies, both listed and unlisted.
