Emerging market ETFs surged to their highest levels in roughly two and a half years in late September 2024, as three tailwinds converged at once: a softer U.S. dollar, a wave of new stimulus measures out of China, and the Federal Reserve's decision to open its easing cycle with a larger-than-usual rate cut. The combination gave developing-market assets their strongest run of sentiment in years.
What Drove the Rally
The iShares Core MSCI Emerging Markets ETF (IEMG), the largest fund of its kind, climbed to fresh highs and was up roughly 12.6% for the year through late September, while the MSCI Emerging Markets Index posted a six-session winning streak, its best run since November. The rally accelerated after Beijing unveiled a package of stimulus measures aimed at shoring up its property market and broader economy, including a cut to banks' reserve requirement ratio and roughly 1 trillion yuan in fresh liquidity support, lifting sentiment toward Chinese and regional equities that carry heavy weightings in most emerging-market benchmarks. South Korea, Taiwan and several Latin American markets also participated in the advance, with fund flow data pointing to some of the largest weekly inflows into dedicated emerging-market funds in years.
The Fed's Bigger-Than-Expected Cut
On September 18, 2024, the Federal Reserve cut its benchmark rate by 50 basis points, launching its easing cycle after holding rates at a 23-year high for fourteen consecutive months. The larger increment, rather than the more conventional quarter-point move, signaled the central bank's confidence that inflation was sufficiently under control to prioritize supporting growth. Lower U.S. rates reduce the relative appeal of dollar-denominated assets and typically ease financial conditions for emerging economies that borrow in dollars, both of which supported the rotation into developing-market equities and bonds. The move also encouraged several emerging-market central banks that had been cautious about cutting their own rates ahead of the Fed to follow suit, further easing domestic financial conditions across the asset class.
Dollar Weakness Reinforces the Flow
A softer dollar tends to pull additional capital into emerging markets by making local assets cheaper for foreign investors and easing debt-servicing costs for governments and companies with dollar liabilities. As the currency weakened following the Fed's move, emerging-market currencies and equities benefited from this classic risk-on rotation. The combination of a friendlier rate backdrop, a weaker greenback and targeted Chinese stimulus created a rare alignment of catalysts that fund flows data showed translating into some of the strongest inflows to the asset class in years.
What It Means for Traders
Emerging-market performance remains tightly linked to the direction of U.S. monetary policy and the dollar, making Fed decisions and dollar index movements essential inputs for anyone trading this asset class. China-specific policy announcements add another layer of sensitivity given the country's outsized weighting in most emerging-market benchmarks. Traders should watch for follow-through in dollar weakness and confirmation of sustained Chinese stimulus, since a reversal in either factor can quickly unwind gains built on this kind of multi-catalyst rally.
Daily market analysis by BCM Markets.