Emerging Markets Defy Gravity as Dollar Weakens and Global Equity Bulls Charge On

If you’re waiting for the moment emerging markets finally roll over, you might want to get comfortable. Despite the usual doom-and-gloom chorus and a global equity rally that’s already made the Dow’s run to 50,000 look like a sideshow, EM assets are quietly staging their own comeback. The real story isn’t just that global equities are running hot, it’s that dollar weakness has become the secret sauce fueling a stealth rally in places most US traders haven’t looked at since 2021.

Let’s cut through the noise: the S&P 500 is flirting with all-time highs, but the real action is happening in markets that have spent the last two years in the penalty box. According to Seeking Alpha, sentiment on emerging markets is turning positive again, even as the investment committee on CNBC debates how much longer the US rally can run. Peter Boockvar of BFG Wealth Partners told CNBC that dollar weakness has been a major catalyst for global stocks, and the data backs him up. The US Dollar Index has stalled, and with the Fed on pause, capital is flowing to higher-growth, higher-risk markets. The result? EM ETFs are seeing inflows for the first time in months, and the pain trade is now being long developed markets and short EM.

The facts are clear. The Dow is at 50,000, the S&P 500 is near record highs, and yet the biggest percentage moves are coming from emerging markets. According to Seeking Alpha, EM funds have seen net inflows of over $3 billion in the past two weeks, reversing a months-long trend of outflows. The dollar has weakened against a basket of EM currencies, with the Mexican peso, Brazilian real, and Indian rupee all posting gains. This isn’t just a short squeeze. It’s a rotation.

The context is critical. For most of the last two years, emerging markets have been the laggards of the global rally. US tech, AI, and large-cap growth sucked up all the oxygen. But as the AI trade hits a speed bump and US valuations look stretched, capital is searching for new opportunities. The dollar’s stall is the catalyst, but the real driver is relative value. EM valuations are cheap, growth is accelerating, and the risk premium is finally starting to look attractive again. If you’re still anchored to 2022 narratives, you’re missing the rotation.

The analysis is straightforward. The dollar’s weakness isn’t just a macro footnote, it’s the linchpin of the current rally. As Peter Boockvar points out, global equity flows follow the dollar, and right now, the dollar is going nowhere fast. With the Fed on hold and inflation expectations anchored, the risk-on trade is back. EM equities are the biggest beneficiaries, but the rotation is also showing up in commodities, FX, and even crypto. The pain trade is now being underweight EM, and the smart money is already moving.

Strykr Watch

Technically, the EM rally is just getting started. Key levels to watch: the MSCI EM Index is breaking out above its 200-day moving average for the first time since 2023. EM FX is rallying against the dollar, with the Mexican peso and Brazilian real leading the charge. Watch for resistance at the 2024 highs, but momentum is strong. RSI readings are elevated but not extreme, suggesting there’s room to run. The next catalyst? US inflation data and Fed commentary. If the dollar rolls over, expect another leg higher in EM assets.

The risks are real. A hawkish Fed surprise could reverse the dollar’s weakness and slam the brakes on the EM rally. Geopolitical shocks, always a risk in EM, could trigger sudden outflows. And let’s not forget the risk of a global growth scare, especially if China’s PMI data disappoints next month. If the dollar snaps back above key resistance, EM assets will be the first to feel the pain. Keep your stops tight and your position sizes reasonable.

The opportunities are clear. Long EM equities, especially via ETFs with exposure to Latin America and Asia, looks attractive here. EM FX trades, long MXN, BRL, INR against the dollar, offer asymmetric upside if the dollar continues to weaken. For the brave, EM local currency bonds are starting to look interesting again, with yields well above developed market alternatives. The rotation is on, and the window is still open.

Strykr Take

Emerging markets are back, and the rotation is real. The dollar’s weakness is the catalyst, but the real story is value and growth. If you’re still hiding in US large caps, you’re missing the move. The pain trade is underweight EM, and the smart money is already there. Don’t be the last to rotate.