Emerging-market stocks and currencies managed to post weekly gains this week, even as US 30-year Treasury yields hovered near their highest level since 2004 and oil prices traded around $105 a barrel. The resilience came as investors balanced concerns about further Federal Reserve rate hikes and geopolitical tensions against a busy calendar of local data and central bank decisions across developing economies.
According to Reuters, MSCI's emerging-market stock index rose 0.1% on the week, while its currency index gained 0.3%. That modest advance may seem small, but it stands out given the headwinds: a firm US dollar, elevated yields that typically pull capital away from riskier assets, and oil prices that can strain import-dependent economies.
Why high US yields usually hurt emerging markets
When US Treasury yields rise, it becomes more attractive for global investors to hold US assets, which often leads to money flowing out of emerging markets. A stronger dollar also makes it more expensive for countries and companies with dollar-denominated debt to service their obligations. Historically, periods of rapidly rising US yields have triggered sell-offs in EM stocks and currencies.
This week, however, the pressure was less severe than many had feared. The 30-year yield's climb to levels not seen in nearly two decades did not derail EM assets, partly because investors saw some developing economies as having sturdier finances than others. Countries with strong foreign-exchange reserves, manageable debt levels, and improving current account balances are better positioned to weather the storm.
Oil at $105 a barrel adds another layer of complexity. For oil-exporting nations, higher crude prices can boost revenues and support their currencies. But for importers, especially in Asia and Africa, the cost of energy imports rises, widening trade deficits and putting downward pressure on local currencies. The mixed impact helps explain why the EM index gains were broad but not uniform.
A busy week for local data and central banks
Investors also had to digest a packed slate of economic data and policy decisions from developing nations. Central banks in several countries have been grappling with how to respond to high inflation and currency weakness, often choosing to raise interest rates to defend their currencies. For example, the South African Reserve Bank's rate hike failed to steady the rand as US yields dominated, a reminder that local policy actions can be overshadowed by global forces.
In Asia, the Indonesian rupiah has been under pressure, heading for its worst week since May as US yields climbed, and at one point hit 17,935 per dollar. These episodes highlight the delicate balancing act EM policymakers face: raising rates too aggressively could hurt growth, while letting currencies slide too far could fuel inflation.
Meanwhile, European stocks were poised for their first weekly gain in a month as oil cooled, showing that the interplay between energy prices and equities is not limited to emerging markets. In the US, the 10-year Treasury yield topped 5.2% as oil neared $105, pressuring stocks globally, but EM assets still found support.
What it means for investors
For everyday investors, the takeaway is that emerging markets are not a monolith. While high US yields and a strong dollar create a challenging environment, some countries are better equipped to handle it than others. The weekly gains suggest that investors are selectively finding value, but the pressure points haven't gone away.
High oil prices remain a key risk, particularly for import-dependent economies. African markets face twin pressures from high US yields and soft oil, illustrating how different regions can be affected in different ways. Similarly, a stronger dollar and rising US yields are pressuring Latin American markets, even as some countries benefit from commodity exports.
Investors should also watch how the Fed's next moves unfold. If US rates stay higher for longer, EM assets could face renewed selling. But if inflation cools and the Fed signals a pause, the relief could be significant. For now, the resilience shown this week is a positive sign, but it's not a guarantee of future performance.
As always, diversification matters. Holding a broad emerging-market fund can spread risk across many countries, but it doesn't eliminate the impact of global factors like US yields and oil prices. Understanding the specific drivers of each region can help investors make more informed decisions.
