GLOBAL RISK APPETITE FAVOURS EMS
Emerging markets (EMs) have posted one of their strongest years in recent memory. EM equities have returned over 28% in dollar terms year-to-date, just under double the S&P 500’s gains and net inflows into EM exchange-traded funds have reached approximately $39 billion. The rally has been broad-based, but its composition reveals a more significant structural shift: capital is increasingly rotating into EMs ex-China.
This distinction matters. For much of the past two decades, the EM investment strategies were synonymous with Chinese growth. That relationship has fractured. Research highlights a pronounced decoupling since the pandemic, with portfolio and bank-intermediated flows to China weakening materially, while flows to the broader EM universe increasing to the stronger end of their historical range. The drivers are familiar – geopolitical risk, regulatory unpredictability, and property sector distress – but the implications are significant. Investors are no longer treating EM as a monolithic asset class; they are differentiating, and the beneficiaries are economies with credible reform stories, commodity exposure, and distance from US-China tensions.
The truce that bought time
The Trump-Xi summit in South Korea at the end of October defused what had threatened to become a full-blown economic confrontation. The United States (US) halved its fentanyl-related tariffs on Chinese goods and suspended reciprocal tariffs for one year. China deferred its sweeping rare earth export controls and resumed purchases of American agricultural products. Risk assets rallied on the news.
Yet, the architecture of the agreement underscores its provisional nature. The suspensions are time-bound, with most measures set to expire in November 2026. Beijing has kept its underlying export-control framework intact, a move Morgan Stanley analysts have described as a “calibrated chokepoint” held in reserve. The underlying rivalry hasn’t gone away; only the near-term tactics have changed. Both sides have chosen to de-escalate ahead of domestic political milestones, but neither has abandoned the tools of economic coercion.
For markets, this amounts to a reprieve rather than a resolution. Global supply chain diversification continues, and the longer-term trend toward economic fragmentation is unlikely to reverse. The rally in risk assets reflects relief at avoided escalation, not confidence in durable outcomes.
A divided Fed at a significant moment
The US Federal Reserve’s (Fed’s) December meeting has emerged as one of the most uncertain policy decisions in years. October’s Federal Open Market Committee (FOMC) minutes and Fed Chair, Jerome Powell’s press conference highlighted a committee with strongly differing views on whether to deliver a third consecutive cut or hold rates steady at 3.75% to 4.00%.
The uncertainty is partly down to incomplete information. The longest government shutdown in US history created gaps in official data releases, leaving policymakers without complete October economic readings ahead of the decision. But it also reflects genuine ambiguity in the economic picture: inflation remains above target at 3%, yet the labour market has softened, and consumer spending data has been mixed.
Market pricing has swung accordingly. As recently as mid-October, futures implied near-certainty of a December cut. That probability collapsed to roughly 30% following hawkish commentary before rebounding to approximately 80% this week after dovish remarks from Fed Governor, Christopher Waller and New York Fed President, John Williams. The volatility in expectations reflects a simple truth: the Fed itself does not yet know what it will do.
For EMs, the stakes are considerable. A dovish Fed would likely extend dollar weakness and reinforce the carry trade (where money is borrowed in a currency with low interest rates and invested into currencies with higher interest rates), providing further support to EM currencies and local-currency debt. A hawkish surprise, or even a hold accompanied by cautious guidance, could trigger a sharp reversal in positioning. The risk is skewed; EM assets have more to lose from a hawkish outcome than they have to gain from a dovish one that is already largely priced in.
Where flows are heading
The rotation out of China and into broader EMs has created opportunities for economies that might previously have been overlooked. Countries demonstrating fiscal discipline, reform momentum, and exposure to commodities in structural demand, including critical minerals, energy transition metals, and agricultural exports, have found themselves newly attractive to allocators seeking EM exposure without concentrated China risk.
This shift is visible in flows data but also in sentiment. Fund managers who spent years underweight in EMs are reconsidering their positioning, drawn by valuations that remain compelling relative to US equities and by growth differentials that favour developing economies as advanced-economy momentum fades. A sustained weakening in the dollar would amplify these dynamics. Yet risks remain. The US-China truce is fragile, and any re-escalation would likely trigger a broad risk-off move that would not spare EM beneficiaries. Fed policy remains uncertain, and the recent rally in EM assets has compressed risk premia, leaving less margin for error. Geopolitical flashpoints, from the Middle East to Eastern Europe also remain unresolved.
The outlook
The current environment favours selective EM exposure. The decoupling of flows from China has created space for differentiated stories to attract capital, and the combination of a tentative trade truce, a likely dovish Fed, and attractive valuations provides a constructive backdrop. But this is not a rising-tide environment; selectivity matters more than broad exposure. For EM allocators, the key question is whether the current confluence of supportive factors represents a durable market shift or a cyclical window that could close as quickly as it opened. The answer will depend on how the Fed navigates its internal divisions, whether the US-China truce holds through year-end, and whether the EM ex-China view holds up under pressure.
A LOOK AT THE MARKETS
Week’s key themes:
- US Treasury markets rallied on Fed rate cut expectations
- Wall Street set to end November in negative terrain
- Gold trades near five-week high as rate cut expectations grow
- Sterling 1.3% stronger for the week following Rachel Reeves’ Autumn budget
Bonds
US Treasury markets rallied significantly, with the benchmark 10-year note dipping below 4% to hit a monthly low. Traders have dramatically lifted their expectations for a Fed rate cut, now assigning a mid-80% probability to a December quarter-point reduction – up from just 30% the previous week – with three further cuts anticipated in 2026. Speculation that Kevin Hassett may become the next Fed Chair has reinforced this dovish outlook. Despite this, recent economic releases proved resilient, with jobless claims falling unexpectedly and durable goods orders beating forecasts. Separately, the Federal Deposit Insurance Corporation plans to ease leverage requirements, enabling banks to expand Treasury holdings.
In the United Kingdom (UK), 10-year gilts fell to 4.53% ahead of Chancellor of the Exchequer, Rachel Reeves’s budget announcement. The finance minister faced a substantial fiscal gap of £20 billion to £30 billion after the Office for Budget Responsibility downgraded UK growth projections. Record non-pandemic borrowing, stagnant business activity, and weak consumer data compounded her challenges. Markets are pricing in an 80% rate cut by the Bank of England (BoE) as inflation cools.
German Bunds stabilised at 2.67% amid mixed domestic signals – disappointing business sentiment but improved consumer confidence – while German gross domestic product remains stagnant. As such, expectations around the European Central Bank (ECB) policy remain anchored.
South Africa’s 10-year government bond yield is hovering around 8.6%, near the bottom of its 52-week range after a strong rally this month. Improved fiscal signals, a recent S&P ratings upgrade and steady South African Reserve Bank policy have boosted demand for local debt, pulling borrowing costs back toward 2021 lows.
Equities
Wall Street futures traded flat heading into November’s final session, with all three major indices poised to close the month in negative territory. The Dow and S&P 500 were marginally lower at 0.29% and 0.4% respectively, while the Nasdaq suffered a steeper 2.15% decline. Technology stocks have been the drivers of the weakness throughout the month as investors have grown cautious about elevated artificial intelligence valuations and uncertain Fed policy. Late-month buying emerged as softer economic readings and accommodative Fed commentary lifted December rate cut expectations to a mid-80% range, with markets anticipating three additional reductions in 2026. Trading was halted on Thursday for Thanksgiving, with an early close scheduled for today.
London equities traded sideways following a post-budget rally. Mining and energy names dragged on the index earlier in the week, with Rio Tinto and Anglo American each shedding 1.3%. Alcoholic beverage producer, Diageo, and food retail and ingredient group, Associated British Foods, provided support alongside gains in major banks. Gambling operators faced selling pressure after quantifying new tax burdens – Evoke abandoned medium-term guidance citing £80 million in 2025 revenue losses, while Entain flagged a £200 million impact.
European bourses finished Thursday’s session mixed, consolidating recent gains as Fed easing expectations and Ukraine ceasefire hopes supported sentiment. Banking shares extended their weekly advance while technology remained volatile.
The FTSE/JSE All Share Index slipped about 1.2% on Thursday to roughly 110,568 points, easing back from recent record highs but still up nearly 30% year-on-year, as broad profit-taking hit heavyweight miners and financials after a powerful multi-month rally.
Commodities
Gold climbed toward $4,190/ounce, nearing a five-week high and extending its winning streak to four consecutive months. Growing conviction around a December Fed rate cut has fuelled the rally. Dovish Fed commentary, softer economic data, and speculation that Kevin Hassett could succeed Jerome Powell as the new Fed Chair, have reinforced easing expectations. The metal is set for its best annual performance since 1979, driven by central bank accumulation and robust exchange traded fund (investment funds traded on stock exchanges) inflows.
Brent crude slipped below $63/barrel, marking a fourth straight monthly decline amid persistent oversupply concerns. The expanded Organisation of the Petroleum Exporting Countries, OPEC+, production increases and rising non-cartel output have weighed on prices. Russian President, Vladimir Putin’s comments suggesting openness to Ukraine peace talks added pressure, as any breakthrough could eventually release sanctioned Russian barrels. Attention now turns to Sunday’s OPEC+ meeting, where the group is expected to maintain its planned output pause into early 2026.
Currencies
The US Dollar Index stabilised near 99.6, stemming recent losses to finish the month flat. Weekly declines of around 0.5% reflected growing Fed easing expectations. Diminishing safe-haven demand amid Ukraine peace discussions also weighed on the greenback.
The euro held just below $1.16/€, near mid-November highs, ahead of key inflation data from major European economies. The ECB is expected to hold rates steady through 2026, with officials noting persistent services and grocery inflation despite overall price pressures easing.
Sterling traded marginally below $1.31/GBP, climbing 1.3% for the week as markets digested the Autumn budget outcomes. The core message was that the UK has to accept a higher, more broadly shared tax burden now to repair and protect public services while keeping the public finances stable. Cooling inflation at 3.6% has lifted December BoE rate cut odds to 80%.
The rand is hovering around R17.15/$ after a choppy November, easing from highs near R17.45/$ but still above the mid-month low around R16.95/$. Softer US data and revived Fed-cut expectations are limiting dollar upside and offering some support to the local currency.
Please note that all information is at the time of writing.
Key indicators:
USD/ZAR: 17.16
EUR/ZAR: 19.89
GBP/ZAR: 22.69
CRUDE: $63.14
GOLD: $4,186
Written by Citadel Advisory Partner and Citadel Global Director, Bianca Botes.
Sources: Bloomberg, Brookings Institutions, Federal Reserve, FinancialContent, Fortune and Franklin Templeton.
