(Bloomberg) — The currency and stock benchmarks for developing economies declined as a flareup in the Middle East conflict reinforced concerns over a global inflation spike and curbed risk appetite.
The MSCI’s emerging-market stock index dropped 0.3%, halting a two day advance that pushed it to a record high. The biggest driver of Tuesday’s decrease were the shares of Taiwan Semiconductor Manufacturing Co., a key supplier of AI chips with the largest weighting in the index.
After a positive start of the week driven by strong tech earnings, reports about the US and Iran exchanging fire drew investor focus back to the fragile ceasefire. The dominant market narrative has flipped from AI optimism to Middle East tensions, according to Ipek Ozkardeskaya, senior analyst at Swissquote Group Holdings SA.
“The higher the tensions, the higher oil prices, and the stronger the dollar,” she said. “A stronger dollar raises imported inflation globally, reinforcing expectations for tighter monetary policy. That, in turn, weighs on risk appetite.”
Currencies of Asian oil importing nations underperformed peers, pulling the MSCI’s FX gauge for developing markets 0.2% lower. Indian rupee hit a fresh record low against the dollar, while Indonesia’s central bank intervened in the market to support the rupiah.
The Indian currency remains vulnerable to high oil price that risks worsening the country’s balance of payments, even as foreign reserves account for about 11 months of imports. This gives the central bank some ammunition to ward off the weakening pressures, said Shibani Kurian, head of equity research at Kotak Mahindra Asset Management.
“But at this point, we expect that the bias for the currency will be toward depreciation,” she said on Bloomberg TV.
In Europe, Romanian assets remained in focus ahead of a no-confidence vote that may topple the government that has implemented a series of fiscal reforms aimed at reducing the biggest budget deficit in the European Union.
The leu traded about 0.3% weaker to the euro, holding near a record low. The central bank in Bucharest allowed the currency to weaken last week under its managed-float regime.
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