EMERGING MARKETS-LatAm assets set for sharpest weekly falls in years as Iran conflict roils markets

By Twesha Dikshit and Purvi Agarwal

March 6 (Reuters) - Latin American currencies were broadly lower on Friday and were on track to post their sharpest weekly declines in years as investors monitored the escalating Iran war that dampened risk appetite, while weak U.S. labor data was also in focus.

Tensions in the Middle East showed no signs of abating with U.S. President Donald Trump saying that there would be no deal with Iran, except "unconditional surrender," while Israel launched attacks on Beirut and continued its military action against Tehran.

Oil prices soared, with shipping and energy exports through the vital Strait of Hormuz halted, adding to concerns over energy supplies that could drive inflation higher.

"Latam is in a very difficult position despite being a sort of safe haven in terms of emerging markets, because it's far away from the conflict in the Middle East, in Ukraine, from the geopolitical noise from China," said Andres Abadia, chief Latam economist at Pantheon Macroeconomics.

"Latam will probably do much better than other emerging markets but it won't be immune to the deterioration of the financial global conditions."

The MSCI Latin American stocks index .MILA00000PUS pared some declines to trade 0.7% lower, set for its steepest weekly fall since June 2022. A corresponding currencies gauge .MILA00000CUS dipped 0.3%, set for its largest weekly loss since October 2023.

Global EM stocks .MSCIEF lost almost $1 trillion in market value after this week's selloff, with markets in Asia and emerging Europe facing pressure due to their reliance on oil imports.

RISK AVERSION HITS MOST EM MARKETS

Most stock indexes in Latin America, including ones in Chile and Brazil, were set for their worst weekly falls since 2023.

However, Chile's stocks .SPIPSA reversed declines to edge higher. Official data showed the country's 12-month inflation fell in February to its lowest level in over six years.

Economists widely expected the Chilean central bank to cut its key rate by 25 bps on March 24, but shifting geopolitical developments could weigh on expectations.

Brazil's benchmark index .BVSP was down just 0.2%, largely due to a 4.5% jump in Petrobras PETR4.SA after it raised the possibility of extra dividends this year.

Industrial production in Latin America's largest economy rose more than expected in January, according to government data, despite high interest rates.

Meanwhile, Colombians head to the polls on Sunday to elect a new Congress and choose three of the presidential candidates who will contest elections in May. The stock index .COLCAP was up 0.3%.

Regional currencies were lower across the board, with the Peruvian sol PEN= down 1%, leading declines among peers.

Chile's peso and Brazil's real BRL= were largely muted, while Mexico's peso MXN= weakened 0.4%. The latter eyed its biggest weekly drop since July 2024.

Meanwhile, data showed the U.S. economy unexpectedly shed jobs in February, potentially hinting at a deterioration in labor market conditions, and clouding the outlook for interest rates in the world's biggest economy.

"It will challenge a growing view among Fed officials that the labor market is stabilizing, and the Iran conflict further compounds the outlook," said economists at Wells Fargo.

"The inflationary impact makes it harder to be a dove at the moment."

Elsewhere, bourses in the Middle East were broadly higher with the exception of those in the UAE and Bahrain, while emerging Europe stocks posted declines.

Still, 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.

Key Latin American stock indexes and currencies: