EMERGING MARKETS-EM assets set for steepest weekly decline in six years as Iran conflict rattles markets

By Twesha Dikshit

March 6 (Reuters) - Emerging market assets ticked lower on Friday and were on track to log their biggest weekly decline since the COVID-19 pandemic in 2020, as the Middle East conflict unnerved markets and dampened risk appetite.

The clash between U.S.-Israel and Iran entered the seventh day, showing no signs of slowing down as Israel carried out heavy strikes on Hezbollah-controlled areas of Beirut on Friday, targeting infrastructure in Tehran, while Iran struck parts of Tel Aviv.

A shutdown of the Strait of Hormuz, responsible for over 20% of daily global oil supplies, sent oil prices surging through the week, stoking supply fears and inflation worries.

Within EM, markets in Asia and emerging Europe reliant on oil imports remained vulnerable to energy shocks, while those in Latin America fared slightly better. The Middle East conflict also drove up demand for safe havens, strengthening the dollar and pressuring EM currencies.

"The EM FX loser board (is) topped by Hungary's forint, Chile's peso, South Africa's rand and then followed by quite a few of the Latam currencies. 2.5%-4% losses against the dollar have been seen this week," said ING's global head of markets Chris Turner.

"Energy deficits are the driving force here, but some of the Latam losses are more down to rising volatility hitting the carry trade."

The MSCI index of EM equities .MSCIEF slipped 0.2%, while a corresponding gauge of currencies .MIEM00000CUS edged 0.3% lower.

MARKETS MIXED AS IMPACT DIFFERS FOR REGIONS

Bourses in the Middle East were mixed with stocks in Dubai .DFMGI, Abu Dhabi .FTFADGI and Bahrain .BAX dropping between 1.1% and 2.8%. Other regional shares were higher, with Egypt's benchmark index .EGX30 rising 2.3%.

Turkey's benchmark index .XU100 dipped 0.7% and was set for a weekly loss of over 5%, while Bucharest's index .BETI rose 0.7%.

Poland's blue-chip index .WIG20 was marginally lower, with Hungary's .BUX and Greece's .ATG down 0.9% each.

The Polish central bank lowered rates by 25 basis points earlier this week as widely expected despite the uncertainty caused by the conflict. Central banker Ludwik Kotecki told local media on Friday that the war in the Middle East meant less space for rate cuts in Poland.

The Hungarian forint EURHUF= fell 1.2% against the euro and was set for its worst week in almost two years. Other currencies in the region also ticked lower.

Hungary said it would stop transit shipments going through the country that are important for Ukraine as long as Russian crude shipments are halted via the Druzhba pipeline.

The Kremlin said the war in Iran had fuelled demand for Russian energy products, saying Russia remained a reliable supplier of oil and gas.

Asian stocks were also mixed, a day after recovering from a sharp selloff, with indexes in Philippines .PSI and Indonesia .JKSE down 1% and 1.6%, respectively.

The U.S. issued a 30-day waiver to allow Russian oil sale to India, heavily dependent on crude imports, senior officials told Reuters.

Investors said they were betting on economic fundamentals and fragmented geopolitics to aid a year-long rally that has seen EM assets outperform peers.

Barclays said money had continued to flow into EM funds despite geopolitical developments with credit funds seeing the largest weekly intake since January 2023.

Asia-focused funds saw outflows but funds investing globally continued to attract interest, data from the bank showed.

LSEG Lipper data showed EM equity funds inflows were at an eight-week low of $5.3 billion.

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