RBA leaves interest rate unchanged, Fed cut sends emerging markets surging

The Reserve Bank of Australia left its interest rate unchanged today.

The Federal Reserve, of course, cut rates last month, and yesterday provided more justification for the move. From MarketWatch:

The pending home sales index fell 6.5% in August after dropping a revised 10.7% in July, the National Association of Realtors reported Tuesday. The index is at its lowest level since its inception in 2001.

Recent history shows that every time the Fed cuts interest rates, it sets off an asset market boom somewhere. This time appears to be no exception. Mike Dolan and Sujata Rao looks at the impact of the latest rate cuts on emerging markets at Reuters.

The bursting of U.S. housing and mortgage market bubbles has suddenly been replaced by emerging markets inflating, and world equities have got pumped up into the bargain.

With the herd mentality of global investors ever sharper, the Federal Reserve's decision two weeks ago to combat a U.S. credit market seizure with lower interest rate has stampeded investors to Asia, Latin America and elsewhere in the developing world.

Investment flows to emerging equity funds hit a 85-week high of $5.53 billion last week, with redemptions from developed market funds providing most of this cash, according to EPFR Global, which tracks funds with $10 trillion in assets globally.

Non-Japan Asia received 53 percent of the total.

And the price action echoes that. MSCI's index of emerging market equities has accelerated more than 13 percent to record highs since the Fed cut on September 18 and has clocked up a whopping 36 percent gain so far in 2007. China's main bourse has more than doubled this year. Brazil is up some 60 percent.

John Authers covers similar ground at the FT but also provides a wider perspective of the equity rally.