Emerging-market assets are heading for their second week of losses as the Middle East crisis shows no signs of abating and concerns grow over the impact of high oil prices.
The MSCI Emerging Markets Index fell as much as 1.7% on Friday and was heading for a weekly loss of more than 2%. Currencies, meanwhile, declined to a fresh session low as the greenback and oil surged on reports the Pentagon is moving a Marine expeditionary unit to the Middle East, as Iran steps up its attacks on the Strait of Hormuz. The South African rand — often a measure of risk appetite, led losses, followed by Eastern European and Latin American currencies.
“The Middle East conflict and its repercussions for energy prices and broader market volatility have shaken EM assets’ defences,” Barclays analysts wrote in a Friday note. “While the duration of the war will likely be key to the broader outlook, external, fiscal and monetary policy buffers may bring some differentiation.”
South African stocks are heading for a correction, having fallen 10% since peaking in late February. Investors unwound bullish bets that made the country’s stock market one of the big gainers last year.
The sour market mood worsened after US President Donald Trump reacted to Iran’s defiance by threatening more attacks. On Friday, the US said it had stepped up strikes on Iran as the war hit the two-week mark and continued to upend energy flows and global markets.
“Risk sentiment suffers from the lasting conflict,” analysts at KBC Group including Mathias Van der Jeugt wrote in a note. “We expect these underlying market dynamic – high oil prices, rising interest rates, stronger dollar, weaker equities – to remain in place going into a very uncertain weekend.”
Concerns about the inflationary impacts of higher energy costs weighed on Treasuries, but short-dated notes outperformed as traders almost fully priced in a Federal Reserve rate cut this year.
The turmoil isn’t sparing even those developing nations that are less dependent on energy imports or whose bonds attractive yields. Citigroup Inc. said it had closed all remaining carry trades on high-yielding emerging currencies, including in the Brazilian real, the Mexican peso and the South African rand.
“We had already cut most of our EM carry trades early in the conflict,” Citi’s strategists including Dirk Willer said in a note. “We had kept a residual in the hope that oil would peak sooner rather than later, but today we take the remainder off, given an additional drawdown, to protect profits.”
The central bank in Nigeria, Africa’s largest oil producer, said it prepared contingency measures to stabilize its currency if it comes under pressure, even as the naira fell less than the rand and the Egyptian pound.
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