An unexpectedly stronger dollar is applying downward pressure on emerging market (EM) growth. But the Direxion Daily MSCI Emerging Markets Bull 3X Shares (EDC) isn’t budging. The fund is up 9%, potentially benefiting from the prospect of eventual rate cuts.
The Financial Times noted that EM currencies are having the worst first half of the year since the pandemic hit in 2020. That’s thanks to mostly a stronger greenback as well as traders unwinding positions in Latin America currencies. The Federal Reserve keeping interest rates steady and fueling a higher-for-longer interest rate narrative. So prospects for EM strength are dimming.
“It’s the combination of a more resilient economy in the US and, on the emerging markets side, emerging markets like Chile, Hungary and Brazil have kept cutting rates,” said Luis Costa, global head of emerging markets strategy at Citigroup. “And let’s be honest, the prospects for growth in EM are not amazing for this year and the next. [There’s] a continued contraction in global trade and it’s a very complicated year for elections.”
EDC gives traders 300% exposure to the daily performance of the MSCI Emerging Markets Index. Alternatively, if there are signs of weakness appearing in EM, traders can take the other side with the inverse-related Direxion Daily MSCI Emerging Markets Bear 3X ETF (EDZ).
Strength in China and India
A potential reason EDC is higher despite the challenging macroeconomic environment for broad EM equities is that 40% of the fund’s country weight is in China and India. Both countries have been bright spots in EM. China is showing subtle signs of an economic turnaround. And India has been exhibiting strong growth.
The Direxion Daily MSCI India Bull 2x ETF (INDL) continues to prosper, rising almost 20% for the year. The fund seeks daily investment results equal to 200% of the performance of the MSCI India Index. This index measures the performance of the large- and midcap segments of India’s equity market. It covers approximately 85% of companies in India’s equity universe.
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