The stock market bounce that began earlier this week is showing signs of holding on.
Investors have brushed off news that the Trump administration looks set to ban telecom equipment by Huawei Technologies, the Chinese tech company that’s been at the heart of U.S. security worries (see buzz). The shift to optimism seems to have started with Wednesday’s news the White House will delay auto tariffs for Europe and Japan.
“While we can all breathe a sigh of relief that we’re not going to see trade wars on multiple fronts, the battle has merely been postponed,” said Craig Erlam, senior market analyst at OANDA.
Onto our call of the day, from Michael Arone, the chief investment strategist for State Street Global Advisors. He tells investors to keep a close eye on the dollar, as strength in that currency could prove a setback for one asset class that’s been popular in 2019.
“This year…we’ve seen $14 billion come into emerging-market ETFs, largely being driven on this idea that with the Fed on hold, the pace of interest rate acceleration will slow and the dollar is likely to decline,” said Arone, in an interview with MarketWatch.
A weaker dollar can help steer investors toward higher yielding, though potentially riskier, emerging markets, while the reverse can be in the case of a stronger dollar, which also makes it tough for those countries to service dollar-denominated debt.
Trade tensions have been stressing emerging-market equities and currencies, as of late, with some concerned collateral damage from a trade war that could hit China’s economy.
The iShares MSCI Emerging Markets ETF
has dropped 6% in May, which has brought its year-to-date gain down to 5.6%, against a 14% rise for the SPDR S&P 500 ETF
which tracks the U.S. index. The ICE U.S. Dollar Index, meanwhile, is up 1.4% for the year, though barely higher for the month so far.
Of course those same trade tensions could mean Chinese officials may keep stoking the economy to reassure investors. China stimulus is supportive for emerging markets, while the region’s higher economic growth rates, rising middle class and growing incomes are also attractive to investors, said Arone.
“The dollar is an important barometer for how some of these risky trades are likely to play out,” he said.
Big banks have been weighing in on the region as well. Bank of America Merrill Lynch, in their May fund manager survey, suggested that investors were perhaps not quite ready for a full-blown trade war, given exposure to emerging markets right now:
In a note to clients Monday, JP Morgan strategists expressed some concern at stress on those markets lately, but were far from throwing in the towel on the region.
“EM in Q2 2019 has echoes of 2018, but we do not expect a repeat of 2018’s EM drawdown (outflows) given the different Fed stance and improved China momentum“ the bank said. Here’s their chart that shows how emerging market investments have been taking hits lately:
Another round for trade wars? President Donald Trump issued an executive order late Wednesday banning Chinese telecom equipment from Huawei, though it didn’t specifically name that company. Huawei reportedly fired back that the U.S. is only hurting itself when it comes to 5G technology. Worth keeping an eye on shares of U.S. chip makers that sell to that company.
will report its first set of results as a public company after the close. The social-discovery platform has been one of the better-performing tech IPOs out of the latest crop. Baidu
which operates a popular Chinese search engine, and chip equipment supplier Applied Materials
will also report later.
What countries are the most stressed? Our chart of the day, from this Gallup poll (h/t The Daily Shot), shows the top five least and most stressed nations.
Not pictured, the U.S. at No. 7 on the most stressed list, just behind Sri Lanka.
Check out that whole survey here
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