Risk sentiment heats up! Interest rate cuts and positive earnings expectations resonate, emerging market stock markets continue to advance

According to the Zhitong Finance APP, emerging market stocks have risen again, as the possibility of a Federal Reserve interest rate cut and optimistic expectations for earnings have boosted market risk sentiment. The emerging market stock index rose by 0.6%, marking its second consecutive day of gains. This year, emerging market stocks have risen every month, with a cumulative increase of nearly 16% so far, while this asset class has also attracted significant capital inflows.

After suffering losses last Friday due to poor U.S. economic data triggering a sell-off, the index has rebounded. Following the release of the U.S. non-farm payroll report, traders increasingly expect the Federal Reserve to cut interest rates. This news led to a decline in stock prices and an increase in bond prices. The money market anticipates an over 80% chance of a 25 basis point rate cut by the Federal Reserve next month, with a one-third probability of another cut by the end of the year. Additionally, the rise in U.S. corporate earnings indicates that, despite the threat of higher tariffs, global economic activity remains strong.

Mohit Kumar, chief economist at Jefferies International, stated, "A moderate economic slowdown would be good news, as the Federal Reserve is likely to adopt further easing policies. In the medium term, we remain in the camp that is optimistic about risk assets. However, we do expect increased market volatility in August, as current market positions are still leaning towards long, and technical factors will begin to turn unfavorable."

Risk asset sentiment has rebounded significantly against the backdrop of market speculation that the Federal Reserve is about to resume its rate-cutting cycle and the continued weakness of the U.S. dollar, which has recently driven a broad resurgence in emerging market assets. Asian electronics and technology companies led the gains, with South Korean chipmaker SK Hynix's stock rising by 2.1%, and BYD Electronics (00285) shares in Hong Kong climbing nearly 8%.

In another source of positive sentiment, data showed that China's service sector unexpectedly accelerated in July, reaching its fastest growth rate in over a year. This indicates strong resilience in the industry during the summer travel peak season.

In Eastern Europe, Hungary's BUX stock index is nearing historical highs, with shares of major bank OTP hitting a record high after significant profit growth in the second quarter.

The camp of investment institutions optimistic about emerging market assets continues to expand, driven by favorable macro tailwinds such as the potential for the Federal Reserve to cut interest rates and the gradual collapse of "American exceptionalism" due to ongoing Trump tariff policies and immigration restrictions. Institutions that have long focused on developed markets like the U.S., including JP Morgan and Amundi SA, are beginning to shift their asset allocation focus towards emerging markets like China.

In the foreign exchange market, the situation is less optimistic. The Indian rupee depreciated by 0.2%, approaching its historical low. The South African rand also fell by 0.6%, as U.S. President Trump announced last week that a 30% tariff would be imposed on imports from South Africa—this is the highest tariff level in sub-Saharan Africa. He also stated that tariffs on Indian exports to the U.S. would be significantly increased due to India's purchase of Russian oil.

Analysts including Chris Turner from ING wrote in a report, "In the short term, market attention on India has increased, thanks to President Trump's renewed focus on India. Yesterday, the threat regarding India's purchase of Russian crude oil became more tangible, as Washington has turned its full attention to this issue." ”