Emerging markets resumed their rally this week as expectations of central bank rate cuts and robust earnings reports strengthened risk sentiment, but analysts caution that August could bring heightened volatility.
The benchmark emerging markets equity index advanced 0.6% in its second consecutive day of gains, recovering from last Friday’s losses triggered by weak U.S. economic data. With inflows supporting the asset class, emerging market equities have delivered positive returns every month this year, pushing year-to-date gains close to 16%.
The rally follows increased bets on a U.S. Federal Reserve rate cut after last week’s jobs report signaled slowing momentum in the world’s largest economy.
Money markets are now pricing in an over 80% probability of a 25-basis-point cut in September with a one-in-three chance of an additional cut before year-end.
The rise in U.S. corporate earnings has also supported global market confidence despite renewed concerns over tariffs.
“A modest weakening of the economy would be good news as it should be more easing from the Fed,” said Mohit Kumar, chief economist at Jefferies International. “We are still in the bullish risky assets camp over the medium term. That said, we do see increased volatility in August as market positioning is still on the long side and technicals would start becoming less favorable.”
Asian equities led the advance, with South Korean chipmaker SK Hynix Inc. gaining 2.1% and BYD Electronic International Co., listed in Hong Kong, surging 8%.
In China, services sector activity accelerated at its fastest pace in more than a year in July, buoyed by summer travel demand and strengthening expectations of sustained recovery.
In Eastern Europe, Hungary’s BUX index traded near record highs after OTP Bank Nyrt. reported a sharp increase in second-quarter earnings, propelling the lender’s stock to an all-time peak.
However, the currency market reflected mixed fortunes. The Indian rupee weakened 0.2% to approach a record low, weighed down by U.S. President Donald Trump’s announcement of 30% tariffs on South African imports—the steepest duties imposed on any sub-Saharan African nation—and a pledge to raise tariffs on Indian exports over New Delhi’s continued purchase of Russian crude oil. The South African rand dropped 0.6% on the news.
“The greater market interest in the short term is President Trump’s newfound focus on India,” ING analysts led by Chris Turner noted. “Here, the threat of secondary sanctions became more real yesterday as Washington squarely turned its attention to India’s purchases of Russian crude oil.”
While the outlook for emerging markets remains broadly positive due to anticipated policy easing and resilient earnings, the combination of stretched positioning, geopolitical risks, and trade uncertainties has analysts urging caution in the weeks ahead.