Will Emerging Markets React Positively to Less Rate Cuts by the Fed?

A peek into last month’s Federal Reserve meeting minutes hinted that the central bank may not stay on a linear course to keep cutting rates moving forward. Lately, the market’s responded to cuts on the upside, but how will U.S. equities react moving forward?

“Federal Reserve officials generally agreed that they likely won’t need to cut interest rates again unless economic conditions change significantly, according to minutes released Wednesday from their most recent meeting,” noted a CNBC report discussing the Fed’s most recent minutes in which it cut rates by a quarter point last month.

“They maintained, however, that policy isn’t on a pre-set course, even if it is likely to remain on hold, and members will continue to assess changes in data and the general outlook,” the report said. “Members often note that Fed policy adjustments work on a lag that can take a year or more to be felt, so they intend on watching how the switch to easier policy will impact financial conditions. The cuts started in July, just seven months after the committee approved the fourth rate hike of 2018.”

“Those sentiments are largely in keeping with recent public statements from Fed officials,” it added. “Chairman Jerome Powell, in congressional testimony last week, said he also felt comfortable with the stance of policy. That includes the low probability of a rate hike as well: Following the Oct. 29-30 FOMC meeting, he further stated that he doesn’t expect increases unless there is a significant move up in inflation.”

Last year, rate hikes were a thorn in the side of emerging markets, but that could reverse course if less rate hikes are in store. Either way, ETF investors can play to emerging markets strength or developed markets strength.

For investors looking for the continued upside in emerging market assets, whether driven by a weakening USD or continued developments around trade, the Direxion MSCI Emerging Over Developed Markets ETF (NYSEArca: RWED) offers them the ability to benefit not only from emerging markets potentially performing well, but from emerging markets outperforming developed markets.

RWED seeks investment results that track the MSCI Emerging Markets IMI – EAFE IMI 150/50 Return Spread Index. The Index measures the performance of a portfolio that has 150 percent long exposure to the MSCI Emerging Markets IMI Index and 50 percent short exposure to the MSCI EAFE IMI Index.

On a monthly basis, the Index will rebalance such that the weight of the Long Component is equal to 150% and the weight of the Short Component is equal to 50% of the Index value. In tracking the Index, the Fund seeks to provide a vehicle for investors looking to efficiently express an emerging over developed investment view by overweighting exposure to the Long Component and shorting exposure to the Short Component.

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