Emerging Markets Stay Under Pressure as Iran Impasse Lifts Oil

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(Bloomberg) — Emerging-market stocks and currencies stayed under pressure as the lack of progress on US-Iran talks lifted oil prices back above $86 a barrel. 

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MSCI’s emerging FX gauge ticked lower versus the dollar for a second day, with the currencies of oil importing Asian nations falling the most. Losses were led by the Philippine peso, which slipped 0.4%, followed by the Thai baht, Indonesian rupiah and Korean won. 

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UBS Group AG strategists said emerging central banks’ apparent reluctance to hike interest rates, the economic hit from higher oil prices and high US yields “are pointing to a higher bar for EM capital flows and FX.”

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“While EM growth has held up through the energy shock thus far, growth differentials are being challenged by a resilient US,” they told clients. “We believe unchanged Fed rates into year-end are necessary for EM FX performance to broaden in the coming one-three months.”

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The South African rand was supported by gold prices holding near $4,000 an ounce, though the rise in oil capped gains. The Hungarian forint steadied versus the euro, ceding an earlier 0.4% gain.

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Read: Asia’s Energy-Starved Nations Go Dark as Hormuz Tensions Drag On

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Bond yields mostly edged higher across emerging markets as the elevated oil prices fanned inflationary pressures. Investors are monitoring central bank meetings in some of the biggest emerging markets for clues on policy.

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Brazil looks set to deliver a fourth consecutive quarter-point interest-rate cut on Wednesday to 14%, though some analysts also expect a hold. India is seen keeping policy steady but investors will want to see how the central bank plans to manage the rupee’s decline. 

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“If energy prices merely remain elevated at these levels, more active central bank policy tightening by September/October time is a growing risk that could challenge the ongoing exceptional appetite for risk,” Derek Halpenny at MUFG Bank said. 

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Meanwhile, an emerging stocks index remained on the backfoot for a second session weighed down by declines in Taiwan’s chipmaker, TSMC. The unwinding of Asian technology positions is at the heart of the latest market correction in emerging markets. However, Korean stocks added 1.6% recouping some of Monday’s 5% slide.

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“The market overhang of crowded investor positioning has dissipated which should hopefully see the focus return to company fundamentals,” said Edward Evans, a portfolio manager at Ashmore Group in London. 

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In other corners of the market, Nigeria said it approved a $4.5 billion loan with the state-owned energy firm to bolster foreign-exchange reserves and spending on the government’s infrastructure projects. An African focused fin-tech eyed a Hong Kong initial public offering to raise about $200 million in a funding round.

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