(Bloomberg) — Emerging-market assets tumbled Friday on renewed concern the conflict in the Middle East would push up inflation worldwide, forcing central banks to pursue higher interest rates and triggering a flight to the dollar.
The MSCI EM Currency index slipped 0.4%, with the Brazilian real, the Chilean peso and the South African rand falling at least 1.2% each. All but one currency weakened across the developing world as the dollar rose for the fifth consecutive day, putting the Bloomberg Dollar Spot Index on track for its biggest weekly advance since early March.
Oil extended its rally, with Brent crude surging above $109 per barrel as US President Donald Trump concluded a trip to China without pushing his Chinese counterpart Xi Jinping to pressure Tehran to reopen the crucial Strait of Hormuz. In an interview with Fox News, Trump said the US doesn’t need the Strait of Hormuz open “at all.”
“It’s full risk-off,” said Alejandro Cuadrado, global head of foreign exchange and chief strategist for Latin America at BBVA. It’s “hitting virtually everything that had rallied over the past few days.”
Government bond yields surged from Japan to the US amid growing fears the price shock triggered by the warwill force central banks globally to take a hawkish stance to contain the impact. US 10-year yields neared 4.6% for the first time in almost a year, while Japan’s 30-year yield hit 4%, the highest since the bonds were issued in 1999. In the UK, a political crisis lifted long-bond rates to a 28-year high.
Back-to-back US reports are already showing a sharp rise in consumer and wholesale prices, fueling speculation that the Federal Reserve and other central banks will need to shift to tightening monetary policy.
“US inflation data this week has clearly indicated that price pressures remain sticky, driving swaps to price in a stronger chance of a Fed rate hike this year,” Shaun Osborne, head of currency strategy at Scotiabank, wrote in a note. “Weak investor sentiment and rising US yields are combining to lift the USD meaningfully against the core majors.”
Traders are pricing in an almost two-thirds chance the Fed will hike interest rates in December.
The selloff was even more pronounced across emerging-market stocks, with the MSCI Emerging Market Index falling 2.8% and heading for its biggest drop since March 23. South Korea led losses as euphoria around artificial intelligence cooled off. The main equity benchmark in Seoul tumbled 6.1% on increased selling by overseas investors.
While China urged reopening the Strait of Hormuz as soon as possible and called for talks on the Iran war, Taiwan remained a subject of tension with the US. Trump said he made no commitment to Chinese President Xi Jinping over Taiwan, and would make a decision soon over a planned $14 billion arms deal with the island.
“Geopolitical developments remain the hot topic across financial markets,” said Francesco Maria Di Bella, a strategist at UniCredit SpA in Milan. “While investors see the recent meeting between US President Donald Trump and his Chinese counterpart Xi Jinping as an encouraging moment, especially regarding a possible resolution to the war in Iran and the blockade of the Strait of Hormuz, geopolitical risks now appear to be playing a major role in investment decisions.”
–With assistance from Ravil Shirodkar.
(An earlier version was corrected to remove reference to currencies in the first paragraph.)
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