Emerging Markets Plummet to Worst Weekly Performance Since March Amid Rising Inflation Concerns

Global Markets Tumble as Middle East Conflict Raises Inflation Concerns

Emerging-market assets plummeted on Friday, propelling both stocks and currencies to their worst weekly drop since early March, as renewed concerns about the conflict in the Middle East fueled worries about global inflation and forced central banks to contemplate higher interest rates. The MSCI EM Currency index fell by 0.4%, with the Chilean peso, Brazilian real, and Hungarian forint each declining by at least 1.4%. The index closed the week 0.9% lower, marking its worst weekly drop since March 6 as the dollar rallied for five consecutive sessions.

Oil prices extended their rally, with Brent crude surging above $109 per barrel after US President Donald Trump concluded a trip to China without pressuring his Chinese counterpart Xi Jinping to force Tehran to reopen the crucial Strait of Hormuz. Trump stated that the US does not need the Strait of Hormuz open "at all." Inflation concerns have been brewing since the onset of the Middle East conflict, and the market is finally taking a reality check of the diminishing scope for Fed easing and the potential for Fed hiking.

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 reached 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 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. Traders are pricing in an almost two-thirds chance that the Fed will hike interest rates in December. "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."

The selloff was even more pronounced across emerging-market stocks, with the MSCI Emerging Market Index falling 2.8%, capping its worst weekly selloff since March 6. 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 stated 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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