EMERGING MARKETS-EM assets sink to two-month lows on oil shock concerns as Iran war drives risk aversion
By Twesha Dikshit
March 9 (Reuters) - Emerging market assets tumbled on Monday, with a surge in oil prices and supply concerns sending investors to the safety of the U.S. dollar and away from risky EM investments, while oil-importing nations faced the brunt of the sell-off.
Bonds were not immune, as oil prices crossed $115 per barrel and spurred investor worries over inflation, raising the possibility of central banks needing to keep rates higher for longer.
Longer-dated frontier market bonds, issued by smaller and riskier emerging economies, suffered the sharpest falls, with Sri Lanka and Pakistan down more than 3 cents, while losses in Egypt and Kenya were not far behind.
The escalating war in the Middle East has led to a closure of the Strait of Hormuz, a vital conduit for over 20% of the world's energy, adding to supply constraints.
Iran named Mojtaba Khamenei as successor to his father as the supreme leader, signalling hardliners remained in charge, in a move likely to draw U.S. President Donald Trump's ire who had previously rejected him as a candidate.
MSCI's index of EM equities .MSCIEF fell 3.1% to a two-month low, while a corresponding gauge of currencies .MIEM00000CUS dipped 0.5%. Both posted their largest weekly decline since the onset of the COVID-19 pandemic in March 2020.
"The impact on EM economies will be differentiated: net energy exporters (especially those geographically remote from the conflict) and economies with robust shock absorption capacity in the forms of large FX reserves and fiscal savings are likely to be the relative winners," said Peter Atanasov, Gramercy's co-head of sovereign research.
Atanasov pointed to Latam and African countries as likely to be less impacted compared with those in Asia and CEE.
Credit default swaps, instruments that gauge an issuer's risk of default, jumped, with Saudi Arabia's 5-year swaps at 11-month high of 93 bps. Those in Qatar, Abu Dhabi and Dubai were up 4 bps each.
Bahrain's CDs soared 23 points to their highest level since November 2022, while Egypt's rose 12 points. Israel and Turkey's gained 3 basis points.
SELL-OFF ACROSS THE BOARD
Middle East markets plunged, with indexes in Qatar .QSI, Abu Dhabi .FTFADGI and Dubai .DFMGI falling between 1.7% and 3.5%.
JPMorgan downgraded the MSCI UAE index to neutral from overweight, and said they preferred Saudi over UAE within the MENA region due to lower foreign ownership and its economy being less exposed to foreign trade and tourism.
The Hungarian forint EURHUF= dropped 1.4%, earlier hitting a seven-month low of 398.70 against the euro. The Polish zloty EURPLN= ticked down, while the Czech crown EURCZK= edged down to six-month lows.
The benchmark index in Turkey .XU100, neighbouring Iran, sank 2.7%, while bourses in Hungary .BUX and Poland .WIG20 were down 1.6% and 1.2%, respectively. Greece, a major shipping nation, saw its stocks .ATG drop 2.2%.
Asian markets sank with Korea's blue-chip index .KS11 losing 6%, triggering circuit breakers earlier and for the second time since the conflict first began.
Indexes in Taiwan .TWII, Philippine's .PSI and Indonesia .JKSE were down between 3.3% and 5%.
Barclays analysts said EM FX had suffered its largest drawdown since "liberation day", when Trump first announced his tariffs, with currencies in Chile, Peru, South Africa, Brazil and Hungary emerging as the biggest losers.
Providing some relief was a Financial Times report that the Group of Seven finance ministers and the International Energy Agency will discuss a joint emergency oil reserves releases, which caused oil to pare some gains.
For TOP NEWS across emerging markets nTOPEMRG
For CENTRAL EUROPE market report, see CEE/
For TURKISH market report, see .IS
For RUSSIAN market report, see RU/RUB
