There’s one big threat to this popular investment for 2019 says State Street


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The stock market bounce that began earlier this week is showing signs of holding on

Investors have brushed off news that the Trump administration looks set to ban telecom equipment by Huawei Technologies, the Chinese tech company that’s been at the heart of U.S. security worries (see buzz). The shift to optimism seems to have started with Wednesday’s news the White House will delay auto tariffs for Europe and Japan.

While we can all breathe a sigh of relief that we’re not going to see trade wars on multiple fronts, the battle has merely been postponed,” said Craig Erlam, senior market analyst at OANDA.

Onto our call of the day, from Michael Arone, chief investment strategist for State Street Global Advisors, who tells investors to keep a close eye on the dollar, as strength in that currency could prove a setback for one asset class that’s been popular in 2019.

“This year…we’ve seen $14 billion come into emerging-market ETFs, largely being driven on this idea that with the Fed on hold, the pace of interest rate acceleration will slow and the dollar is likely to decline,” said Arone, in an interview with MarketWatch.

A weaker dollar can help steer investors towards higher yielding, though potentially riskier, emerging markets, while the reverse can be in the case of a stronger dollar, which also makes it tough for those countries to service dollar-denominated debt.

Trade tensions have been stressing emerging-market equities and currencies, as of late, with some concerned collateral damage from a trade war that could hit China’s economy.

The iShares MSCI Emerging Markets ETF

EEM, +0.19%

 has dropped 6% in May, which has brought its year-to-date gain down to 5.6%, against a 14% rise for the SPDR S&P 500 ETF

EEM, +0.19%

 , which tracks the U.S. index. The ICE U.S. Dollar Index, meanwhile, is up 1.4% for the year, though barely higher for the month so far.

Of course those same trade tensions could mean Chinese officials may keep stoking the economy to reassure investors. China stimulus is supportive for emerging markets, while the region’s higher economic growth rates, rising middle class and growing incomes are also attractive to investors, said Arone.

“The dollar is an important barometer for how some of these risky trades are likely to play out,” he said.

Big banks have been weighing in on the region as well. Bank of America Merrill Lynch, in their May fund manager survey, suggested that investors were perhaps not quite ready for a full-blown trade war, given exposure to emerging markets right now:

In a note to clients Monday, JP Morgan strategists expressed some concern at stress on those markets lately, but were far from throwing in the towel on the region.

“EM in Q2 2019 has echoes of 2018, but we do not expect a repeat of 2018’s EM drawdown (outflows) given the different Fed stance and improved China momentum.“ Here’s their chart that shows how emerging market investments have been taking hits lately:

The market



 , S&P 500


 and Nasdaq


 futures are tilting higher after a stronger session for Wall Street on Wednesday.

The dollar

DXY, +0.02%

is down, gold


is softer and crude


is higher.

Europe stocks

SXXP, +0.47%

 are . Asian equities were a mixed bag, with the Korean

SEU, -1.20%

 dropping 1.2%.

The buzz

Another round for trade wars? President Donald Trump issued an executive order late Wednesday banning Chinese telecom equipment from Huawei, though it didn’t specifically name that company. Huawei reportedly fired back that the U.S. is only hurting itself when it comes to 5G technology. Worth keeping an eye on shares of U.S. chipmakers that sell to that company.


WMT, -0.41%

 shares are up after the retail giant’s profit beat forecasts, though sales fell short.

Read: Amazon and Walmart’s next-day shipping could bust your budget


CSCO, +0.81%

 shares are up after the networking group results and forecast came in better than Wall Street expected.


PINS, -1.24%

 will report its first set of results as a public company after the close. The social-discovery platform has been one of the better-performing tech IPOs out of the latest crop. Baidu

BIDU, +0.07%

 , which operates a popular Chinese search engine, and chip equipment supplier Applied Materials

AMAT, +3.72%

 will also report later.

The economy

Weekly jobless claims, housing starts and building permits and the Philly Fed manufacturing index are all due ahead of the open.

The tweet

Reaction, such as the one above, continues after Alabama banned virtually all abortions in the state on Wednesday. Missouri’s Senate, meanwhile, has just passed a bill to ban abortions at eight weeks.

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