Global investors turn sour on EMs after record-setting rally amid regional war

Emerging market currencies and stocks have taken a beating as the war in the region prompts a sell-off of riskier assets, snapping a record-setting rally that had taken hold amid fears of an AI bubble in the West and a desire to diversify from the USD, Bloomberg reports. Haven trades are back in charge, with investors rotating toward Treasuries, the CHF, and investment-grade emerging markets, excluding the Gulf, as we wrote yesterday.

By the numbers: A gauge of developing-nation FX fell 0.9% after touching all-time highs last week as the USD strengthened. Meanwhile, EM stocks dropped as much as 1.9% — the steepest slide in a month, led by tech and consumer discretionary names. Pakistan’s market plunged enough to trigger an hour-long halt, marking its biggest drop on record.

Local-currency bonds of net oil-importing countries saw yields rise as Brent crude jumped 8.6% to around USD 79 / bbl — its highest in more than a year — while gold rallied alongside the greenback.

JPMorgan also slashed its overweight recommendation on EM currencies and local bonds by half on the back of the sell-off.

Central banks moved fast: Indonesia and India intervened in FX markets, while Turkish lenders reportedly sold about USD 5 bn to steady the TRY. “There’s panic selling at first, then normalization,” said Osmanli Portfoy CEO Mehmet Gerz.

The bigger risk is inflation: Barclays warned that sustained higher oil prices could delay rate cuts across easing-cycle economies like South Africa, Poland, Turkey, and Hungary. Bloomberg Economics sees crude potentially climbing as high as USD 108 / bbl if tensions intensify.

MARKETS THIS MORNING-

Asia-Pacific markets opened in the red this morning as the escalating regional war enters its fourth day. South Korea’s Kospi is down over 3.6% — despite defensive sector gains — and Japan’s Nikkei is down 2.2%. Over on Wall Street, indices are set to open in the red today, with futures down across the board.

THE CLOSING BELL-

The ADX fell 1.3% on Friday on turnover of AED 3 bn. The index is up 6.9% YTD.

In the green: BHM Capital Financial Services (+14.7%), Sukoon Takaful (+4.2%), and Emirates Reem Investments Company (+3.2%).

In the red: International Financial Advisors Holding Company (-7.9%), Agility The Public Warehousing Company (-6.1%), and Emirates NBD (-5.2%).

Over on the DFM, the index fell 1.8% on turnover of AED 2.1 bn. Meanwhile, Nasdaq Dubai was down 3.1%.