Need to Know: There’s one big threat to this popular investment for 2019, says State Street

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, the chief investment strategist for State Street Global Advisors. He 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 toward 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“ the bank said. Here’s their chart that shows how emerging market investments have been taking hits lately:

The market

Dow US:YMH9 S&P 500 US:ESH9  and Nasdaq US:NQH9  futures are tilting higher after a stronger session for Wall Street on Wednesday. Read Market Snapshot for more.

The dollar DXY, +0.14% is down, gold US:GCU8 is softer and crude US:CLU8 is higher.

Europe stocks SXXP, +0.44%  are. Asian equities were a mixed bag, with the Korean SEU, -1.20%  dropping 1.2%.

Read:

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. chip makers that sell to that company.

Walmart 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

Cisco CSCO, +0.81%  shares are up after the networking group results and forecast came in better than Wall Street expected.

Pinterest 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 chart

What countries are the most stressed? Our chart of the day, from this Gallup poll (h/t The Daily Shot), shows the top five least and most stressed nations.

Not pictured, the U.S. at No. 7 on the most stressed list, just behind Sri Lanka.

Check out that whole survey here

The economy

U.S. housing starts climbed almost 6%, but construction is still lagging. Weekly jobless claims fell sharply, while the Philly Fed manufacturing index rebounded to a four-month high.

The tweet

Reactions, such as the one above, continue 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.

Read: Most women who receive an abortion say they can’t afford a child

Random reads

Former media baron Conrad Black, pardoned by Trump

Stainless steel rabbit sculpture sells for $91 million, sets new auction record

Over 200,000 angry “Game of Thrones” fans want a Season 8 do-over

Over 50? Start doing puzzles to boost your brainpower

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