Emerging Market Rebound Evidence of a Growing Divide From Developed Nations

Stocks in emerging market economies continued their torrid run yesterday (Wednesday), hitting a 13-month high and further separating themselves from developed economies.

The MSCI Emerging Market Index rose for the third consecutive session climbing 0.4% to 928.40 -; its highest level in more than a year according to Bloomberg News.

"The outlook for emerging markets is still positive given signs of global recovery, low interest rates and abundant liquidity," Nigel Rendell, emerging markets strategist at RBC Capital Markets in London, told Bloomberg in an interview.

However, the recent surge in emerging markets has been as much a function of a weaker dollar as it has economic strength.

The price of gold hit $1,048 an ounce yesterday -; its second record in as many days -; on the back of a weaker dollar. The rally boosted a broader surge in commodities that drove investors into mineral-heavy markets such as Russia, Africa, and South America.

Russia's dollar denominated RTS Index, which has more than doubled in value this year, jumped more than 2% to its own 12-month high. The country's Micex Index climbed 0.5% and its ruble also strengthened, rising 0.3% a basket of currencies.

Indeed, resource rich emerging markets have proven resilient in the current recession. Many had limited exposure to the risky mortgage-backed securities that's responsible for the current economic fallout, and others have saved large portions of the revenue generated by last year's surge in commodities prices.

Australia unexpectedly increased interest rates on Tuesday, making it the first Group of 20 nation to raise borrowing costs since the start of the biggest economic meltdown in 70 years.

The rate increase sets up a looming rift between developing economies that are seeing an early recovery from the economic downturn, and the world's largest economies that prefer to keep stimulating their financial systems with record low interest rates and liquidity.

Some countries like Australia, Israel, Norway and Brazil were relatively insulated from the global recession and could be headed toward sustained rounds of raising interest rates to clamp down on the economic accelerator and ward off inflation.

But central bankers in the United States and Europe, with ailing economies still sputtering from high unemployment and lax consumer spending, are unlikely to take their foot off the gas for many months to come.

"Those economies that had bigger financial problems are going to feel the lasting impact of the downturn and those on the periphery are going to recover a bit quicker," Joseph Lupton, an economist with JPMorgan Chase & Co. (NYSE: JPM) told The Wall Street Journal.

Analysts' forecasts show U.S. companies will report a ninth straight quarter of declining profits, the longest streak since the Great Depression, before returning to growth in the final three months of the year, according to Bloomberg.

Yet signs are emerging that U.S. central bankers envision the days of low interest rates could soon be coming to an end.

Federal Reserve Bank of Kansas City President Thomas Hoenig on Tuesday said increases to the Fed's target interest rate don't pose a threat to the nascent economic recovery in the United States.

"I would not support a tight monetary policy in the current environment, but my experience tells me that we will need to remove our very accommodative policy sooner rather than later," he said in a speech in Denver.

Meanwhile, the dollar has fallen to record lows against foreign currencies, burdened by near-zero domestic interest rates and ballooning federal deficits.

Until the central bank decides to raise interest rates, investors are likely to favor emerging market stocks over the stocks of more developed economies.

"Anything that can show growth in this low-growth environment is going to be bid up by investors. It's very pro the emerging-market world versus the developed world." Fidelity International's Anthony Bolton told Bloomberg in a television interview from Hong Kong.

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