Fed Rate Cut Will Help, But Policy Makers in Emerging Markets Need to Do More

The last week has been full of turmoil for Emerging Markets. After the strong numbers in jobs data in USA led to anxiety that rate cut by Fed may not materialize, the sentiment turned negative on EMs. On the basis of sentiment gauge we use to measure news flow sentiment, the pessimism was visible across different EMs. No wonder that correction was quick and deep. Irrespective of whether this kind of reaction was justified and up to what extent, this sentiment turn was significant.

Thankfully, it reversed very quickly. Across emerging markets are rising after Mr. Jerome Powell indicated that Federal Reserve may cut rates this month. This event is significant for two reasons, a) it is for the first time in more than a decade that Fed will cut the rates, b) the markets across the world has started to factor in this possibility for quite a while and any finality on this issue which would have been against this expectations will be disastrous.

The experiments in psychology have conclusively proven that winning and losing the same amount leads to happiness but much bigger unhappiness, respectively. The sad reaction to loss is almost twice as powerful as happy reaction to winning an equal amount. The same thing applies to markets. It is always the case with markets that positive expectations and investor sentiment or belief on favorable developments help the stocks but when it doesn’t materialize for whatever reason, the negative impact is much more powerful.

While you always want favorable tailwinds and support of global macro factors and there is nothing wrong in investor sentiment being linked to this event as reflected in prevailing news flow. However, the expectations that a rate cut will work more favorably for EMs and this event will help in boosting price of assets in EMs is only going to short lived. There are more important issues and every EM has different specific problems to handle. These are different markets and prescription need to be different on what will work for each one of them.

It may appear from the immediate market reaction that a rate cut by Fed will help each of the EMs and to almost everyone equally, but there can’t be anything else which is a bigger illusion. Investor sentiment is impacted as a result of these developments and that is a key thing to focus on in the near term but other fundamental factors will continue to be more important for EMs and that is something news flow based sentiment gauge as of now is not really able to capture completely. The need to do that is an immediate priority when we look at EM news or EM sentiment.

Research Team
EM Alpha LLC

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About EMAlpha:

EMAlpha, a data analytics and investment management firm focused on making Emerging Markets (EMs) accessible to global investors and unlocking EM investing using machines. EMAlpha’s focus is on Unstructured Data as the EMs are particularly susceptible to swings in news flow driven investor sentiment. We use thoroughly researched machine learning tools to track evolving sentiment specifically towards EMs and EMAlpha pays special attention to the timely measurement of news sentiment for investors as these markets can be finicky and sentiment can be capricious.Our team members have deep expertise in research and trading in multiple Emerging Markets and EMAlpha’s collaborative approach to combining machine learning tools with a fundamental approach help us understand these markets better.

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