Emerging Markets Contribute to Global Selloff Amid Rising Borrowing Costs

Emerging-Market Assets Plunge Amid Renewed Concerns Over Middle East Conflict

Emerging-market assets tumbled on Friday, driven by renewed concerns that the conflict in the Middle East would push up inflation worldwide, prompting 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.

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. Trump stated that the US does not need the Strait of Hormuz open "at all."

Government bond yields surged from Japan to the US amid growing fears that the price shock triggered by the war will 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.

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Back-to-back US reports have shown 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. Traders are pricing in an almost two-thirds chance that 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.

Taiwan remained a subject of tension with the US, with Trump stating that 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.

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