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Emerging Markets Party Like There's No Tomorrow. (Pro Tip: There's a Tomorrow.)

By Ben Eisen

Morning MoneyBeat is the Journal's pre-market primer. To receive this morning newsletter via email, click here: http://on.wsj.com/MoneyBeatUSSignup

Market Snap at Tue, 23 Aug 2016 08:27:44 -0400 ET

S&P 500 Futures 0.17%

↑ 2185.25

DJIA Futures 0.19%

↑ 18555

U.S. 10 Year -3/32

↑ 1.552%

WSJ Dollar Index -0.3%

↓ 85.39

Crude Oil -3.52%

↓ $46.81

Gold 0.12%

↑ $1345

Europe

Asia

FTSE 100

0.61%

Nikkei 225

-0.61%

DAX

0.74%

Hang Seng

CAC 40

0.7%

Shanghai

0.16%

Overnight Developments

Stocks mostly rose Tuesday, bolstered by fresh signs the eurozone economy remained on solid footing after the U.K.'s Brexit referendum.

Futures pointed to a 0.2% opening gain for the S&P 500, even as crude oil prices dropped for a third consecutive session.

The Stoxx Europe 600 was up 0.8% in early afternoon trading after IHS Markit said its measure of private-sector activity rose to 53.3 from 53.2 in July, reflecting a modest improvement. Officials at the European Central Bank are closely watching the health of the eurozone economy ahead of their meeting on Sept. 8.

In Asian trade, stocks in Japan fell 0.6% as the dollar retreated against the yen, weighing on shares of export-heavy car companies.

The Breakfast Briefing

Investors are gorging on emerging markets while the getting is good.

The iShares MSCI Emerging Markets ETF, which tracks an emerging markets benchmark index, is up 15% this year, compared with the S&P 500's 6.8%. Much of the rally has been premised on the idea that the Federal Reserve will be slow to lift interest rates, keeping the U.S. dollar from getting stronger even as global economic growth improves.

That's made many investors bullish on the sector. More than $13 billion has flowed into emerging markets stock and bond funds since late July, outpacing flows into mature markets, according to the Institute of International Finance. BlackRock, the world's largest money manager, said Monday it was upgrading emerging markets equities to "overweight" relative to benchmarks.

There's no telling how long the emerging markets party will last. But eventually, the careful balance between an improving economy and the Fed's commitment to keep rates low is likely to become unstable. That could hit emerging markets in the same manner seen at the beginning of the year -- after the Fed lifted rates in December, the iShares ETF crashed more than 10% in January and the beginning of February.

Investors are already preparing for a rate rise, with traders in the fed funds futures market putting even odds on a rise before the end of the year, according to CME Group. Fed Vice Chairman Stanley Fischer gave an upbeat outlook on the economy Sunday, saying the U.S. is close to hitting its inflation target. Some economists believe that Fed Chairwoman Janet Yellen could use a speech Friday to signal a plan for lifting interest rates this year.

When emerging markets aren't rallying, they're often plunging. Compared with the S&P 500, Russell 2000, and MSCI EAFE, the MSCI Emerging Markets Index has been the best or worst performer in 23 of the 28 years through 2015, according to Regions Asset Management. During the 13 years when it was the best, it returned 45% on average, but during the 10 years when it was the worst, it returned minus 16%.

"Emerging markets tend to be a 'feast or famine' exposure for investors," said Brandon Thurber, director of investment research at Regions Asset Management, in a Monday note.

When the feast is over, the heartburn could set in.

Daily Factoid

On this day in 1939, Germany and the Soviet Union sign a non-aggression pact

MoneyBeat Podcast

Play Podcast →

Paul Vigna, Jack Otter and Chuck Jaffe discuss why the Rio Olympics isn't winning the gold in the ratings game and a nervous bear with a book deal gets some investment advice.

Tweet of the Day

I think we're at peak 'overexcited by fiscal stimulus'. Looking forward to peak 'disappointed by fiscal stimulus', coming November/December. -- Mike Bird @Birdyword

Key Events

10:00 a.m.: New Home Sales for July [Prior: 592,000; Consensus: 580,000]

Sales of newly built homes rose solidly in the first half of 2016 including an increase in June, a sign of healthy momentum in the U.S. housing market aided by low interest rates.

10:00 a.m.: Richmond Fed Manufacturing Index for August [Prior: 10]

In July, the index showed that factory activity across the central Atlantic region rebounded, a sign that many U.S. manufacturers are seeing improvements in customer demand.

Stocks to Watch

Best Buy Co. shares are up 15% before the bell after the consumer-electronics retailer beat earnings expectations, logged an unexpected same-store-sales growth, and raised its guidance.

Shares of Zoe's Kitchen Inc. are down 14% in premarket trading after the fast-casual restaurant chain late Monday cut its guidance for the fiscal year.

Car-parts suppliers Delphi Automotive PLC and Mobileye NV are both up about 4% after announcing they're joining forces to develop a fully autonomous driving system.

Toll Brothers Inc. fell 0.3% in premarket trading. The home builder's results were roughly in line with consensus.

Wells Fargo & Co. may also move after the Consumer Financial Protection Bureau said Monday it fined the bank $3.6 million for illegal student loan servicing.

Today's Video

Play Video →

Former Victoria's Secret model Tyra Banks will be a guest lecturer for a personal-brands course at Stanford in May. WSJ's Dahlia Bazzaz joins Lunch Break to discuss.

Number of the Day

The number of days in the past 30 in which the S&P 500 moved by more than 0.5% in either direction, the lowest since the fall of 1995.

Must Reads

It's Getting Scarily Quiet in the Market: The S&P 500 has been remarkably tranquil. The danger isn't so much complacency about markets but complacency about central banks.

Risks Linger as Global Hunt for Yield Pumps Up Stocks That Act Like Bonds: Stocks in sectors like consumer staples, with steady dividend payouts, are finding big fans in the market.

The Hunt for Yield Ends in Argentina: Argentine companies are returning to global debt markets, selling $4 billion in bonds this year at yields up to 9%. Some issues, though, have floundered, as investors say they remain too risky.

Is Oil in a Bull or Bear Market? Depends on the Day: When crude shifts as much as it does, it gets hard to tell what kind of market we're in. There are no rules about how big a bull or bear market can be or how long it can last.

A Window of Opportunity Cracks Open at Valeant: Easing financial conditions could give Valeant's new finance chief an assist.

Canada's Desmarais Clan -- A New Generation Takes Control: Power Corp. of Canada's Paul Desmarais Jr. and brother André are readying their 34-year-old sons to take over a $48 billion corporate empire.