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Somewhat Bearish -25

EM stocks dip on Iran fears, eye best month since 2022

📉 Emerging market stocks and currencies declined Thursday as fears over potential escalation in the Iran war weighed on investor sentiment.

⛽ Oil prices surged more than 7%, pushing Brent crude to a fresh four-year high amid concerns about supply disruptions from the region.

🦅 The US Federal Reserve kept interest rates unchanged, revealing deep divisions on the board and causing markets to scale back rate cut expectations through 2026.

📈 Despite the daily dip, MSCI emerging market stock indexes are on track for their biggest monthly gain since November 2022 due to improved risk appetite earlier this month.

🤝 A temporary ceasefire between the US and Iran was extended earlier in the week, though stalled negotiations have led analysts to price in a more protracted conflict.

🏦 Emerging market bond ETFs face sell pressure as higher oil prices and a hawkish Fed stance could widen credit spreads and hurt bond prices despite equity strength.

🇿🇦 South African stocks rose 0.7% supported by a gold price increase of over 1%, while Turkish equities gained 0.4% on domestic factors.

🇪🇺 European emerging markets showed mixed performance, with Hungarian equities rising 1% following a sweeping election victory by the centre-right Tisza party.

🇹🇷 Turkey's lira fell 0.3%, while Hungary's forint is set for its strongest monthly gain since June 2012 despite daily declines against the euro.

📉 Asian markets which had rallied on AI optimism also saw declines, though South Korea and Taiwan recorded their best monthly performance in decades.

🇷🇺 Russia's economy contracted by 0.3% in the first quarter, marking its first quarterly contraction since early 2023 amid geopolitical isolation.

📉 Sri Lankan bonds fell more than a cent on the dollar driven by the sharp rise in oil prices and broader geopolitical tensions.

🌍 Analysts at Deutsche Bank stated that investors are pricing in a longer conflict as no signs of peace talks emerge despite mounting concerns about escalation.

💰 Higher oil prices support energy-linked EM currencies like the South African rand even while broad EM stocks experience daily declines.

⚠️ A key risk for emerging market equities is a fast de-escalation or credible deal that could crush oil prices back below current surge levels.

📉 Credit spreads in emerging markets may tighten and reverse duration hits if the Federal Reserve turns dovish sooner than priced or if oil falls significantly.

Bullish Signals
  • South Korea and Taiwan recorded their best monthly performance in decades despite global volatility.
  • Hungarian equities rose 1%, supported by a center-right election victory that followed the sweeping win for the Tisza party.
  • Turkish equities gained 0.4% even amid broader regional concerns.
  • South African stocks rose 0.7%, bolstered by a more than 1% increase in gold prices, which remains one of the country's key exports.
  • The Hungarian forint is set for its strongest monthly gain since June 2012 after the positive election outcome.
  • Emerging market stocks are on track for strong monthly gains despite the daily decline, with the gauge poised for its biggest monthly rise since November 2022.
Risk Factors
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  • MSCI's emerging market indexes fell 0.2% and 1.2%, respectively, indicating broad declines in equity and currency value.
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  • Most stock indexes traded lower on the day despite a potential for monthly gains, showing immediate pressure from geopolitical fears.
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  • Rising oil prices and a hawkish Federal Reserve stance are adding to pressure on emerging markets.
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  • US President Donald Trump is expected to receive a briefing on fresh military strikes on Iran, raising fears of supply disruptions.
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  • Oil prices surged more than 7%, which highlights the volatility driven by geopolitical tensions in the region.
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  • Shipping disruptions in the region have kept oil prices elevated, raising concerns about persistent inflation.
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  • Analysts at Deutsche Bank say investors are pricing in a more protracted conflict, as no sign of peace talks exists and fears mount about escalation.
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  • Markets scaled back expectations for rate cuts, now anticipating rates could remain unchanged through 2026.
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  • Deep divisions within the Federal Reserve board marked the most dissent since 1992 at Jerome Powell's final meeting as Chair.
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  • Sri Lankan bonds fell by more than 1 cent on the dollar due to a sharp rise in oil prices.
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  • Russia's economy contracted by 0.3% in the first quarter, marking its first quarterly contraction since early 2023.
Full Analysis
MSCI indices tracking emerging market stocks and currencies declined on Thursday, with stock levels dropping 1.2% and currency indexes falling 0.2%, driven by concerns over a potential escalation in the conflict between the United States and Iran. Oil prices surged more than 7% amid fears of supply disruptions from shipping halts in the region, pushing Brent crude to a fresh four-year high. Despite the daily downturn, both MSCI equity and currency indexes are poised for their strongest monthly performance since November 2022, following improved risk appetite earlier in the month when a US-Iran ceasefire was announced and subsequently extended, even as diplomatic negotiations stalled. Analysts at Deutsche Bank noted that investors are pricing in a protracted conflict rather than an imminent resolution, with President Donald Trump expected to receive a briefing on plans for fresh military strikes aimed at pushing Tehran back to negotiations. The combination of rising oil prices and a hawkish stance from the US Federal Reserve added significant pressure to the markets; notably, the Fed held interest rates unchanged at Jerome Powell’s final meeting as Chair, revealing deep divisions within the board and causing markets to scale back expectations for rate cuts, now anticipating rates could remain stable through 2026. This monetary tightening combined with higher inflation risks is expected to widen EM credit spreads and impact bond prices negatively. Regional performance was mixed amid these broader geopolitical and economic headwinds. While most stock indexes traded lower, South Korean and Taiwanese equities recorded their best monthly performance in decades, driven by AI optimism. In Europe, Hungarian equities rose 1% following a sweeping election victory by the centre-right Tisza party, contributing to a forint rally set for its strongest monthly gain since June 2012, while Polish stocks fell 0.6% and Romanian shares remained flat. South African stocks gained 0.7%, supported by gold prices rising more than 1%, whereas Turkish equities increased slightly despite the Turkish lira falling 0.3%. Additionally, Russia’s economy contracted by 0.3% in the first quarter based on preliminary data, marking its first quarterly shrinkage since early 2023, and Sri Lankan bonds fell over one cent against the dollar due to oil price volatility.