Emerging-market assets climbed on September 19, 2024, the day after the Federal Reserve delivered its first interest rate cut in four years, as traders weighed the move alongside a fresh round of policy decisions from central banks in Turkey, South Africa and Brazil. The combination of a weaker dollar and easier global monetary conditions gave developing-market stocks and currencies their longest winning streak in months.
A Broad-Based Advance
A gauge of emerging-market equities jumped 1.1%, while MSCI's index of developing-market currencies added 0.1%, extending a run of gains to a seventh straight session, its longest winning streak since July. Brazil's real led currency gains among major emerging markets, supported by expectations of further local rate moves that boosted its appeal to carry traders seeking yield in a lower-rate global environment. South Africa's rand and a handful of other high-yielding currencies also firmed, while equity gauges in Latin America and parts of emerging Asia extended a rally that had already been building in the days leading up to the Fed's decision.
Why the Fed's Cut Mattered
Lower U.S. interest rates reduce the yield advantage of holding dollar-denominated assets, prompting some investors to rotate into higher-yielding emerging-market debt and equities. Fed easing also loosens financial conditions globally, giving emerging-market central banks more room to adjust their own policy rates without triggering the capital outflows that higher-for-longer U.S. rates can provoke, a dynamic that had constrained several developing economies over the prior two years. The Fed's move brought the federal funds target range down to 4.75%-5.00%, its first cut in four years. Emerging-market central banks did not all move in the same direction that week: Brazil raised its benchmark rate by 25 basis points, its first hike in two years, even as South Africa's central bank cut, underscoring how divergent local policy paths converged around the same Fed-driven catalyst. The 50-basis-point size of the Fed's opening cut, larger than many economists had expected, reinforced the message that policymakers were prepared to move decisively rather than incrementally.
Dollar Weakness and Its Ripple Effects
The dollar softened as markets priced in a lower path for U.S. rates, a shift that tends to make emerging-market assets relatively more attractive on a currency-adjusted basis. Historically, past Fed cutting cycles have coincided with meaningful emerging-market rallies, though drawdowns along the way are typical, underscoring that the asset class remains more volatile than developed-market equivalents even during periods of broad-based dollar softness. Country-specific factors, from commodity exposure to domestic political risk, continued to differentiate performance across the emerging-market universe even as the dollar move provided a common tailwind.
What It Means for Traders
The Fed's shift to an easing cycle is one of the more reliable macro tailwinds for emerging-market currencies and equities, but the size and duration of any rally depends heavily on individual countries' own rate decisions and fiscal positions, as illustrated by Brazil's outsized currency gains that week. Traders should track both the Fed's path and local central bank calendars together, since EM assets tend to react most sharply when the two signals reinforce each other.
Daily market analysis by BCM Markets.