How significant is Jay Powell’s U-turn for emerging markets?

The answer is, pretty considerable. The US Federal Reserve chair’s reversal of direction when he indicated the Fed would hold off more rate rises, gave an extra encouragement to what was already shaping up to be the best month for emerging market bonds since 2016.

Over the preceding year, the combined forces of US interest rates, the dollar, and dollar liquidity have driven EMs. They had a torrid time for the first three quarters of last year. While the Fed continued dialing-up interest rates, the dollar strengthened and the central bank offloaded some of the assets it bought following the financial crisis, in a process known as “quantitative tightening” (QT). That changed in the fourth quarter. Although QT was seen as on autopilot at $50bn a month, the Fed “introduced flexibility” to the outlook on interest rates.

In the two days after the meeting, EM local currency bonds jumped 2 percent, according to JPMorgan’s GBI-EM index. While not a spectacular move, it means local currency bonds have restored three-fifths of their almost 13 percent fall in value between March and September last year.

Foreign currency EM sovereign bonds in JPMorgan’s EMBI-GD index are within a whisker of their value a year ago. Which is functioning as a green light for EM risk assets.