EMERGING MARKETS-Latam FX, stock plunge to over one-month low as Middle East war stokes inflation fears

By Twesha Dikshit

March 3 (Reuters) - Latin American assets dropped to over one-month lows on Tuesday, deepening the previous session's selloff as the conflict in the Middle East escalated, driving a surge in oil prices and reigniting inflation concerns.

Oil extended gains for a third session as the war widened, stoking fears regarding supplies. Iran responded to the U.S. and Israeli air war with strikes against energy infrastructure in Gulf countries and tankers in the Strait of Hormuz.

The vital waterway is responsible for the passage of a fifth of the world's oil and liquefied natural gas. A senior Iranian Revolutionary Guards official said the waterway was closed, warning of fire on any ship trying to pass.

"That the current War may be 'inflationary' is what's panicking traders today. That's amid stories about a potential stoppage of energy products passing through the War zone, and the higher energy prices that this has engendered," Macquarie analysts said in a note.

The MSCI Latin American equity index .MILA00000PUS fell 6.2%, its largest one-day fall since U.S. President Donald Trump first announced sweeping tariffs last April. A corresponding currency gauge .MILA00000CUS was down 2% against a stronger dollar.

Still, not all EM countries will be affected equally, with those dependent on oil imports being more vulnerable, while the impact of the conflict could go beyond inflation to pressure external balances and capital flows.

"Net fuel importers and those reliant on external capital flows are vulnerable, which means a lot of EM excluding Latin America and Sub-Saharan Africa," said Hasnain Malik, Tellimer's EM equity and geopolitical strategist.

Shell's SHEL.L Brazil CEO said the conflict could provide the South American nation with an "enormous opportunity" to attract investments to develop its oil assets.

RISK-OFF MOOD EMBROILS GLOBAL MARKETS

Brazil's benchmark index .BSVP tumbled 4.2% while the real weakened 2.5% against the U.S. dollar. Data showed the region's largest economy only grew 2.3% in 2025, its weakest performance since the 2020 COVID pandemic as high interest rates weighed on consumption and investment.

Stocks in copper-exporter Chile .SPIPSA plunged 4.9% as the risk-off mood extended to precious metals. The peso CLP= posted its largest one-day decline since April and was last down 3.4%.

Indexes in Colombia .COLCAP and Mexico .MXX, which export oil, posted declines of 2.3% and 4.1%, respectively. The Colombian peso COP= was down 1.5%, while Mexico's peso MXN= dropped 2.8%. Argentina's stocks .MERV and currency ARS= fell over 1%.

The broader MSCI emerging markets index .MSCIEF was set to lose over 5% in the previous two sessions. South African assets including stocks, government bonds and the rand extended their selloff, weighed down by a pullback from gold.

Poland's blue-chip index .WIG20 lost 4.1%. Stocks in Greece .ATG, a dominant force in global shipping, slumped 5.6%.

Meanwhile, the UAE Capital Markets Authority said the country's bourses would resume trading on Wednesday, after a two-day suspension following Iran's strikes on the Gulf state.

Key Latin American stock indexes and currencies at 1448 GMT: