What Is Driving Emerging Market Stocks?

Economic

Summary:

Emerging market stocks have rallied in recent months, supported by trade de-escalation and a weaker U.S. dollar.

The initial U.S.-China agreement is seen as a key driver behind a broader rebound in global equity markets by UBS Global Research analysts.

The shift in trade tone has been particularly favorable for emerging markets, with Latin America among the leading beneficiaries.

A softer U.S. dollar has played a crucial role. Historically, a decline of more than 5% in the dollar has correlated with EM equities outperforming U.S. stocks by an average of 11%.

That trend has re-emerged this year, with the weaker dollar boosting EM currencies and valuations, helping many markets recover from earlier lows.

Despite the recovery, UBS notes that much of the optimism has already been priced in.

Current valuations are near historical averages. For further gains, continued earnings growth and stable trade dynamics will be essential. A resurgence in trade tensions or weak earnings could weigh on macro fundamentals and stall the rally.

Investors are also increasingly looking to diversify away from the U.S. UBS sees a gradual shift toward broader international equity exposure as investors seek to reduce concentration risk.

Still, this process is expected to unfold over time. Recent gains in EM stocks have come quickly, leading to a more balanced short-term outlook.

Meanwhile, the U.S. remains a key engine of corporate profits, particularly in technology and artificial intelligence, making it difficult for global portfolios to reduce exposure entirely.

UBS maintains a neutral stance on EM overall but sees select opportunities for active investors focused on fundamentals.

Taiwan and India stand out for their long-term growth potential, driven by structural trends and improving earnings. In mainland China, UBS favors the tech sector following a solid earnings season.

Analysts expect strong profitability to continue through 2025 and 2026, with markets still underestimating the potential for sustained earnings growth in the low- to mid-double digits.

In Latin America, Brazil has led gains, buoyed by favorable global sentiment and currency support. UBS notes that while this trend may persist, domestic variables are becoming more relevant.

Brazil’s fiscal outlook, monetary policy, and the 2026 presidential elections are likely to shape investor sentiment.

UBS expects the central bank to begin easing rates in the fourth quarter of 2025, provided fiscal conditions remain stable. Political developments will be a key determinant for market performance in 2026.

Source: Investing

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Gerik

Economic

U.S. Inflation Eases, But Economic Outlook Remains Uncertain

The U.S. economy is facing increasing uncertainty as inflation pressures show signs of easing, but key economic indicators signal ongoing challenges. The Federal Reserve has refrained from cutting interest rates in anticipation of clearer signals from the market, as shifting trade policies under President Trump continue to cause unpredictability.

The Federal Reserve's preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, showed a 2.1% year-over-year increase in April, a slight dip from 2.3% in March, bringing it closer to the Fed's target of 2%. The core PCE, which excludes food and energy prices, rose by just 0.1% in April, bringing its annual rate to 2.5%, down from 2.6% in March. While these figures indicate some easing of inflation, the outlook remains volatile due to the uncertainty surrounding Trump's fluctuating tariffs.

Impact of Tariffs on Inflation and Economic Growth

President Trump’s trade policies have had a significant impact on inflation, particularly as tariffs on Chinese imports continue to affect costs. The uncertainty around tariffs has led to a slow-down in consumer spending, with retail chains like Costco and Walmart warning that further price increases may be necessary as they grapple with higher costs due to tariffs.

Economists have warned that inflation due to tariffs may become more evident in the summer months, particularly in June and July, but could then subside as the market adjusts. Stephen Stanley, chief economist at Santander, forecasts that the U.S. economy may experience a temporary slowdown due to tariff-related inflation but should recover by 2026 with a growth rate of around 2.5%.

Consumer Spending Slows, but Employment Remains Stable

The latest data from the U.S. Bureau of Economic Analysis shows that consumer spending, which makes up over two-thirds of U.S. economic activity, grew by only 0.2% in April, a sharp deceleration from March’s 0.7% increase. This slowdown reflects a broader trend of cautious consumer behavior in response to rising costs and uncertain economic policies. However, employment data remains relatively strong, with low jobless claims and a stable labor market, which has led the Fed to maintain its current interest rate policies for now.

The Fed’s Cautious Approach Amid Uncertainty

Despite the easing of inflation, the Federal Reserve remains cautious, with officials signaling that they are not yet ready to cut interest rates. Fed officials argue that while inflation is cooling, the economy still requires stability, and the labor market is not in a state of crisis. The Fed continues to focus on incoming data, with future policy decisions dependent on the continued evolution of trade policies and consumer behavior.

However, President Trump’s criticism of the Fed has intensified, with the President arguing that the central bank's reluctance to lower rates is a mistake. Trump has pushed for immediate rate cuts to stimulate the economy, but the Fed has maintained that it needs more data before making further adjustments.

While inflation shows signs of easing, the U.S. economy remains uncertain, with trade tensions, shifting tariffs, and policy inconsistencies adding to the volatility. The Fed’s decision to hold off on rate cuts reflects its cautious stance, but concerns over the impact of tariffs on long-term economic stability persist. With Trump’s ongoing pressure on the Fed and potential further disruptions in global trade, the outlook for U.S. economic recovery remains unpredictable.

Source: CNBC

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Economic

China–U.S. Trade War

Trump's Accusation of China Violating Trade Agreement Escalates Tensions

In a social media post on May 30, U.S. President Donald Trump accused China of completely violating the trade agreement recently reached between the two countries. Trump asserted that China’s economy was in "serious economic danger" two weeks ago due to the high tariffs he had imposed on Chinese goods, which, according to him, left Chinese businesses "almost unable to trade with the U.S., the world's number one market."

Trump claimed that he quickly negotiated a deal with China to prevent this dire situation, which, he said, had stabilized the country’s economy and allowed trade to continue as usual. However, he expressed frustration, stating that China had fully violated the terms of the agreement, leaving him disillusioned with the deal's outcome.

Beijing's Strong Rebuttal

In response, Beijing called for Washington to "immediately correct its mistakes" and cease imposing discriminatory measures against China. The Chinese government also reiterated its commitment to uphold the agreements reached during high-level talks in Geneva, urging both countries to maintain the consensus achieved in the negotiations. The call came amid increasing concerns that trade tensions between the U.S. and China could once again escalate, especially with the failure to fully remove non-tariff barriers, as promised in the May 11 agreement.

The dispute centers on the implementation of the trade deal, particularly concerning the removal of non-tariff barriers that the U.S. had agreed China would eliminate. U.S. Trade Representative Jamieson Greer had previously stated that China had yet to fulfill this commitment. Trump’s accusation further heightens the uncertainty surrounding the trade relationship between the two largest economies in the world, as both sides continue to point fingers over the terms of their agreement.

This back-and-forth underscores the ongoing volatility in U.S.-China relations, which has been marked by trade disputes and tariff impositions since Trump’s administration first introduced these measures in 2018.

Source: The New York Times

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Devin

Economic

India's economy picked up speed in the most recent quarter as manufacturing and private consumption continued to show resilience.

Official data on Friday showed that India's economy grew 7.4% in January-March, speeding up from the revised figure of a 6.4% expansion in the prior quarter to set its strongest pace of growth in a year.

That topped the median estimate for 6.8% growth compiled in a Wall Street Journal poll of economists and came after an unexpectedly sharp slowdown in the July-September quarter fanned concerns that the economy was losing steam.

For the full fiscal year, the world's fifth-largest economy expanded 6.5%, in line with the government's forecast as momentum increased in the final quarter.

The data comes as the economy stands at a crossroads: years of robust growth have put it on the cusp of becoming the world's fourth-biggest economy, but it continues to face internal and external challenges.

Economists had largely expected the data to show that the economy had picked up in the final fiscal quarter, citing ramped-up government spending, stronger consumption thanks to easing inflation, and recovering rural demand.

Nomura economists reckon the strong services sector will help support growth in the current fiscal year. India could emerge as a winner of supply-chain shifts resulting from the U.S.-China trade tensions, they said in a note.

Friday's figures showed that manufacturing activity strengthened in the January-March period from the previous quarter, with growth rising to 4.8% from 3.6%. The construction sector's momentum picked up, as well as the mining and quarrying sector.

Growth in private consumption slightly fell to 6.0% from 8.1%, while government spending slipped, contracting by 1.8% during the quarter, compared to the 9.3% growth in the October-December period.

India will likely be a key global growth engine for 2025 and 2026, given the structural growth drivers like the rapid build-out of India's physical and social infrastructure capacity, productivity gains and household-savings resilience, BofA global research analysts wrote in a note.

In line with the growth story, India's capital markets have delivered one of the best returns in the world over the past few decades, they added, but highlight that they are cautious in the short term given lingering trade risks that might not be fully priced in, and the expectation that India's continuing monetary stimulus will help drive a "shallow revival" of growth, capital expenditure and consumption growth, they said.

Source: TradingView

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Gerik

Economic

China–U.S. Trade War

China's Strong Response to U.S. Semiconductor Export Controls

Amid escalating trade tensions, China has accused the U.S. of "abusing" its control over semiconductor exports, claiming that Washington is engaging in discriminatory practices against China’s semiconductor industry. The U.S.'s ongoing restrictions on critical technologies like AI chips have intensified concerns that the tech war between the two largest economies will only escalate. China’s spokesperson, Liu Pengyu, reiterated the country’s displeasure, calling on the U.S. to immediately rectify its actions and stop these unfair measures.

The U.S. has increasingly tightened its grip on China's access to critical technology, particularly in semiconductors. This comes after President Donald Trump accused China of violating a preliminary trade deal and delaying the implementation of the agreement. The U.S. Trade Representative's office echoed these concerns, suggesting that China was deliberately stalling the trade negotiations. Despite a temporary 90-day tariff pause agreed upon in May, tensions have resurfaced, particularly concerning technology transfers and exports.

U.S. Semiconductor Restrictions: A Growing Issue for China

This conflict is rooted in broader concerns over national security. The U.S. has been imposing export controls on key technologies to limit China’s access to advanced semiconductor designs and manufacturing capabilities. In 2019, the U.S. government cut off Huawei’s access to American technology, which led the Chinese tech giant to develop its own chips. Under President Biden, these restrictions have expanded to include major American chipmakers such as Nvidia and AMD, barring them from selling advanced AI chips to China.

The latest round of restrictions, including the ban on Nvidia’s H20 chips, has significant financial implications. Nvidia estimates that these restrictions will cost the company around $8 billion in lost revenue for the current quarter, with $4.5 billion worth of inventory rendered obsolete. Nvidia CEO Jensen Huang has criticized the U.S. policy, stating that it is based on the assumption that China cannot develop its own AI chip technology, a belief he now considers "clearly wrong."

A Changing Semiconductor Landscape

The ongoing trade war and U.S. export restrictions are pushing China to develop its own semiconductor ecosystem, potentially leading to the emergence of a parallel technology standard, separate from U.S. norms. This shift is concerning to some U.S. tech companies, who fear that China’s advancement in semiconductor capabilities could weaken their dominance in the global tech market.

Moreover, the U.S. government recently revoked a broad regulation known as the "AI Diffusion Rule," which had placed controls on semiconductor exports to various countries, signaling a shift toward more narrowly defined policies. However, experts warn that these new rules may not be enough to prevent China from building a self-sufficient semiconductor industry, which could reduce the effectiveness of U.S. export restrictions.

The semiconductor sector remains a key battleground in the U.S.-China trade war, with both nations using technology as a strategic lever in the ongoing geopolitical struggle. China’s accusations of U.S. “abuse” of export controls reflect growing frustration with the U.S.'s approach to technology policy. As both sides continue to assert their dominance in this critical area, the global tech landscape faces a potentially dramatic shift that could reshape international standards and disrupt global supply chains.

Source: CNBC

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Gerik

Economic

China–U.S. Trade War

U.S. Tariff War Results in $34 Billion Loss for Global Corporations

The ongoing trade war led by U.S. President Donald Trump has already cost global companies more than $34 billion, according to a Reuters report. This figure includes losses from decreased revenue and rising costs triggered by the tariffs, with the outlook for further economic damage bleak. As global companies continue to navigate the uncertainties surrounding U.S. trade policies, experts predict that the financial toll will likely increase.

The $34 billion in losses primarily stem from 32 companies listed in the S&P 500, three companies from the European STOXX 600 index, and 21 companies from Japan's Nikkei 225. Major global corporations such as Apple, Ford, Porsche, and Sony have already revised or lowered their profit forecasts, citing the unpredictable and erratic nature of U.S. trade policies under Trump. These companies struggle to adjust to the rising operational costs caused by tariffs, especially on raw materials such as aluminum and electronics.

The automotive, airline, and consumer goods sectors have been hit particularly hard by the tariff policies. Analysts believe that the actual cost to these businesses may be even higher than publicly reported, given the ongoing uncertainties surrounding tariff implementation and global supply chains.

Challenges in Forecasting Amid Trade Uncertainty

According to Rich Bernstein, CEO of Richard Bernstein Advisors, forecasting in the current tariff environment has become increasingly difficult. The unpredictability of trade relations, particularly with China, has made it almost impossible for companies to make accurate predictions regarding their business costs. This uncertainty is reflected in Wall Street’s revised expectations, which show a significant slowdown in earnings growth. While analysts previously forecasted a 5.1% growth rate for companies in the S&P 500 for the second half of 2025, this is a steep decline from the 11.7% growth rate seen in the previous year.

The impact of the trade war is being felt not only in the immediate financial losses but also in the broader economic outlook. As companies grapple with higher costs and weaker revenue growth, the overall global economy faces increased uncertainty. The disruptions caused by tariffs are making it harder for businesses to operate efficiently, while the prospect of prolonged trade instability continues to weigh on investor confidence.

The U.S.-China tariff conflict has already led to substantial losses for businesses across the globe, with no immediate end in sight. While the direct costs reported are already significant, the full extent of the economic damage may be even greater. As the trade war continues to create turmoil, companies will likely need to adjust their strategies and business models to navigate this new, uncertain economic landscape. The focus now shifts to whether policymakers will find a way to ease the trade tensions or if the damage to global businesses will continue to mount.

Source: Reuters

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Economic

U.S. Consumer Spending Stalls, Offering Temporary Relief to Inflation

In the latest economic report from the U.S. Department of Commerce, consumer spending in April showed only a slight increase, signaling a slowdown in household expenditure as people tightened their belts amid ongoing economic uncertainty. This decrease in spending has provided temporary relief to inflation, with the core price index marking the lowest annual increase in four years.

Despite the easing in inflation, the Federal Reserve is unlikely to resume interest rate cuts anytime soon, as the impact of tariffs on import prices is expected to continue affecting costs. Economic experts believe the inflationary effects of the tariffs have not fully played out yet, as many companies are still selling off inventories accumulated before President Trump's tough trade policies were fully implemented.

Economic Uncertainty Continues Amid Tariff Disruptions

The U.S. economy is facing challenges in its recovery, particularly after the first-quarter GDP data showed a contraction for the first time in three years. However, the trade deficit narrowed significantly in April, partly due to a decrease in imports as companies reduced stockpiling in response to tariffs. The U.S. Treasury recently reported that the trade deficit fell by 46% to $87.6 billion, which could provide some support for GDP growth in the upcoming quarter.

The future outlook remains uncertain, especially as the U.S. Court of Appeals temporarily reinstated the tariffs previously blocked by the U.S. Trade Court. The tariffs continue to create economic turbulence, complicating the forecasting process for businesses and consumers alike.

Consumer Sentiment and Fed’s Response

The slowdown in consumer spending is partly attributed to a decrease in discretionary purchases, such as cars, clothing, and entertainment goods. While spending on services such as housing, healthcare, and dining out has increased, the reduction in goods-related purchases points to a tightening of household budgets.

Personal savings rates have increased to 4.9% in April, the highest in a year, as people prioritized savings amid concerns about the uncertain economic environment. Wages also grew by 0.5%, with a significant portion of the increase being directed toward savings.

Inflation Indicators and Future Expectations

Despite the easing of inflation in April, consumer inflation expectations remain high. The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, rose by 2.1% year-on-year in April, down from 2.3% in March. The core PCE, which excludes food and energy, increased by just 0.1%, reflecting the slowest annual increase since March 2021.

Kathy Bostjancic, Chief Economist at Nationwide, warned that while inflation has temporarily cooled, it could reverse in the second half of the year as businesses adjust prices to account for ongoing tariff-induced cost increases. This ongoing inflationary pressure could potentially force the Fed to take more aggressive action later in the year.

While U.S. consumer spending has shown signs of slowing down, offering temporary relief to inflation, the long-term economic outlook remains uncertain. The combined impact of tariffs, rising costs, and consumer behavior could put additional pressure on the U.S. economy, while businesses continue to navigate the complex trade landscape. The Fed is likely to hold off on rate cuts for now, but inflationary pressures could prompt further interventions in the near future.