The Federal Reserve's policy shift combined with the ceasefire in the Middle East has initiated a rebound journey for emerging market assets

According to the Zhitong Finance APP, emerging market assets experienced a comprehensive rebound on Tuesday, with market sentiment significantly improving due to the dual impetus of signals from the Federal Reserve's policy and a de-escalation in geopolitical tensions. The MSCI Emerging Markets Currency Index rose by more than 0.6% in a single day, with the South Korean won, Chilean peso, and Malaysian ringgit performing particularly well. In tandem, the US dollar index and the 10-year US Treasury yield weakened, while the emerging market stock index recorded its largest single-day gain since April.

The increase in market risk appetite is closely related to Federal Reserve Chairman Jerome Powell's testimony before Congress. Powell hinted during the hearing that recent declines in inflation data and signs of a cooling labor market might open a window for an earlier rate cut, echoing the dovish remarks of several Federal Reserve officials made previously. The US Consumer Confidence Index for June, released on the same day, fell short of expectations, further reinforcing market expectations for a third rate cut by the Federal Reserve this year. However, Paresh Upadhyaya, head of US fixed income at Amundi, pointed out that Powell still maintains a "cautious rate cut" framework, emphasizing the need for more economic data to confirm the timing of a policy shift.

The easing of geopolitical risks has become another important driver. With US mediation, Israel and Iran reached a temporary ceasefire agreement, directly boosting the prices of assets in developing countries. The Israeli shekel surged by 1.7% at one point during the trading session, reaching a new high since January 2023, while Egyptian dollar bonds led gains in the emerging and frontier market bond sectors. Michael Brown, a strategist at Pepperstone, analyzed that Iran's symbolic retaliatory actions against US military bases quickly led to a ceasefire, allowing investors to temporarily shift their focus back to economic fundamentals, stating that "the geopolitical factors that dominated market fluctuations over the past two weeks have temporarily taken a back seat."

Regional markets displayed a divergent pattern, with the Mexican peso strengthening as inflation data for early June fell, but the market generally expects the country's central bank to maintain interest rates this week. Conversely, the Brazilian real fell against the dollar, as the central bank's meeting minutes indicated that policymakers remain vigilant about inflation being above the target range. In Eastern Europe, the Hungarian central bank held rates steady for the ninth consecutive month, while Slovenia issued its first sustainable development-linked bond, following the trend of countries like Chile and Kazakhstan to enhance risk resilience through green financial instruments.

The continued improvement in investor sentiment is translating into enthusiasm for allocating to emerging markets. HSBC's latest quarterly survey shows that among 100 fund managers surveyed, the proportion bullish on emerging market assets has reached a two-and-a-half-year high. If risk appetite maintains its current strength, emerging market stocks are expected to continue delivering excess returns. This optimistic expectation is underpinned by the market's anticipation of a resonance between the Federal Reserve's policy shift and the easing of geopolitical tensions, but analysts also remind that close attention should be paid to the upcoming US non-farm payroll data and the subsequent developments in the Middle East