How the Fed’s Rate Hike and Emerging Markets Correlate
Fed rate hike
The Fed’s gradual rate hike has a significant effect on the overall global market (ACWI). In the previous part of this series, we discussed how the Fed’s rate hike is impacting developed markets (EFA)(VEA), specifically the S&P 500 index (SPY). In this part, we’ll have a look at the correlation between emerging markets (EEM)(VWO) and the Fed’s rate hike.
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Emerging market performance
The iShares MSCI Emerging Markets ETF (EEM), which tracks emerging markets’ performance, showed a strong return so far this year. The ETF rose nearly 20% on a year-to-date basis as of July 13, 2017. Between December 2015 and June 2017, the EEM ETF rose nearly 33%. However, the S&P 500 index rose nearly 19%. Since December 2015, the Fed has started its gradual rate hike process. It increased its key interest rate for the first time in a decade in December 2015.
The correlation between emerging markets and the Fed’s fund rate stood at -26% during this period. The Fed’s rate hike is impacting emerging markets negatively, but the negativity is marginal. When the Fed hikes interest rates, it strengthens the US dollar (UUP). The stronger US dollar is a major threat to emerging markets. When the dollar index strengthens, money flows into the dollar index and out from emerging markets. But now, changing demographics in emerging markets could be an important growth driver their economies.
For more analysis, see Why Marc Faber Thinks There Is an Asset Bubble.