Weekly Market Update: is the Emerging Markets story changing?

The latest economic news and market highlights from the UK and abroad.

This week's headlines: 

• Iran and Oman close to inking a deal – Iran has said it’s close to signing a deal with Oman to open the Strait of Hormuz. Under the proposed agreement, Tehran would control inbound traffic, while Oman would control outbound movements. The US has repeatedly rejected Iran’s demand that ships pay a toll to cross through the Strait.
  
  
• US steps in as yen hits four-decade low – this week saw a rare joint move where the US stepped in to help Japan prop up the yen, after it fell to a 40-year low. High inflation caused by the US-Iran war has provided limited support for a yen rebound.
  
  
• SpaceX faces scrutiny – SpaceX published its results for the first time since its IPO this week, alongside the release of additional shares following the end of lock up periods.  The figures showed that spending had ballooned to $18.3bn, more than six times what it was a year ago, mostly driven by AI. Shares fell following the announcement and have traded below its $135 debut price for several weeks.
  
  
• BP announces highest profit since 2022 – the company announced profits of $5.73bn last quarter, more than double the same period last year. This was driven by higher oil prices, though the company is restructuring.
  
  
• EasyJet ready for takeover – EasyJet has agreed to a $5.4bn takeover from US firm Apollo. One of the largest airlines in Europe, it was the subject of a bidding war between two US investment companies.

An end in sight?

We’ve experienced months of oil disruption, and we’ve seen sharp tacks between hot and cold in the negotiations. And swings in the oil price as a result.

A potential deal between Oman and Iran could provide a route back towards normality, although much depends on the US’s involvement and willingness to support the agreement. Washington has been against any tolls in the Strait of Hormuz, but the proposed deal seems to allow for fees on crossings. As ever, until ships are moving, supply of oil and inflation will remain under pressure.

Yen friends 

The US decision to back the yen is interesting. It’s the first time they’ve done it since 2011. The amount they propped it up by is unknown, but Treasury Secretary Scott Bessent had a note on his desk snapped by a Reuters journalist at a cabinet that said, “To do: Buy Japanese Yen $5-10bn”. My shopping list in comparison has cottage cheese on it. 

Why did they do it? Japanese government bonds could impact US borrowing costs, with Japan holding $1.1tn of US debt. Selling it could cause more than a headache for US interest rates if they liquidated it to shore up the yen.

Hey big AI spender… part three

Another week, another set of corporate results. While SpaceX’s revenue beat expectations, it showed a massive increase in spending too. Many can understand that rockets cost money, but the main expense was AI.

And they said they’d keep spending the same amount. Investors are understandably jittery about increased expenditure. Again, it’s interesting to see the impact of expenditure on future expectations. 

Easy come, easy go

EasyJet, a leader in European aviation has been bought for a lower price than it was worth prior to the Iraq war and before the pandemic. While it still needs to be approved by regulators, it’s another well-known name lost from the UK markets taken into private hands.

However, the deal also highlights that opportunities remain within UK equities, with investors continuing to identify value among London-listed companies.

Emerging Markets are becoming less correlated

The table above shows the monthly return correlations between eight of the largest MSCI Emerging Markets country indices.

Often, it’s easy to view Emerging Markets as a single story. But the countries within the sector are becoming less correlated. Over the past five years, monthly return correlations across these eight countries averaged 0.36, down from 0.53 over the five years before that.

Each country has its story to tell. Some markets like Korea and Taiwan are fully involved in AI technology, showing their high correlation to each other. And there’s been a lot of focus on them over the past few months with big swings up and down as sentiment changed.

But other countries are driven by commodities, energy, or domestic demand.

What it shows is that broad exposure to Emerging Markets as a sector offers a great level of diversification.

UK: UK equities moved higher fuelled by companies like Diageo and Persimmon. However, was weighed down by companies like Relx, Lloyds, Barclays sliding.

US: The S&P 500 and Dow touched record intraday and closing highs earlier in the week before dipping down. Caterpillar and Palantir powered the early gains, while SpaceX and AMD weighed later on.

Europe (ex UK): European equities climbed this week driven by resilient corporate earnings, and strong tech and healthcare sector performance.

Japan: Japanese equities experienced a volatile week due to the currency drama. Stocks struggled due to the tech-sell off and AI weakness. A large part of the gain shown is actually from the currency difference.

Asia Pacific ex Japan: A tough week due to geopolitics and the oil price, plus further slides for chip manufacturers like SK Hynix and Samsung.

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.