Emerging Assets Decline Amid Middle East Tensions

Global Markets Tumble as Middle East Tensions Spike Inflation Concerns

The currency and stock benchmarks for developing economies declined sharply on Tuesday, 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 the decline were the shares of Taiwan Semiconductor Manufacturing Co., a key supplier of AI chips with the largest weighting in the index.

The market narrative has flipped from AI optimism to Middle East tensions, as reports about the US and Iran exchanging fire drew investor focus back to the fragile ceasefire. Currencies of Asian oil-importing nations underperformed peers, pulling the MSCI's FX gauge for developing markets 0.2% lower. The Indian rupee hit a fresh record low against the dollar, while Indonesia's central bank intervened in the market to support the rupiah.

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The Indian currency remains vulnerable to high oil prices, which 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 weakening pressures.

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.