Markets

At years end, emerging markets beholden to Fed

Central banks are cramming in their last decisions of 2018, with at least seven in emerging markets scheduled to set monetary policy this week. But none will be as closely watched as the Federal Reserve.

Most traders expect US policy makers to raise rates. The suspense centers on what Chairman Jay Powell has to say following the announcement, particularly about forecasts for interest rates and the economy, as investors question if the Fed will keep hiking amid tame inflation and doubts about global growth. Central banks in Japan and Britain will announce their rate decisions a day later.

“King USD has started to lose its rate appeal of late, as the Fed has struck a more cautious tone,” Credit Agricole strategists, including London-based Valentin Marinov, said in a research note last week. “The recent underperformance of US risk assets and the return of US political risk could further mean that the USD outlook could deteriorate on a more lasting basis over the medium term.”

Thats good news for emerging market assets, especially since currencies, stocks and bonds are headed for their first annual drop since 2015 and are relatively cheap.

Other than the flurry of central bank action, Chinas leaders will hold their annual economic policysetting meeting and Saudi Arabia will dominate headlines in the Middle East when it announces its 2019 budget. Mexican assets may react to President Andres Manuel Lopez Obradors budget plan, which includes more spending on social programs and infrastructure, while still preserving the fiscal framework established by his predecessors.

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