Emerging market stocks and currencies experienced fluctuations this week, with the MSCI global EM stocks index largely influenced by a tech-heavy Asian bourse performance. While Friday saw some gains, particularly in Asian chip stocks ahead of SK Hynix's US debut, the overall week was marked by declines, primarily due to a global pullback in tech stocks over concerns about lofty valuations and renewed tensions in the Middle East. The Middle East conflict led to surging oil prices, with Brent and U.S. crude futures climbing over 11% for the week, reaching just under $85 a barrel. This rise in oil prices is fueling inflation concerns and could prompt the Federal Reserve to consider interest rate hikes.
The sell-off in the semiconductor sector was a significant factor, with investors questioning whether the massive investments in artificial intelligence can justify current valuations. A US gauge of chip giants slumped more than 4%, and Taiwan Semiconductor Manufacturing's American depositary receipts also dropped. This sentiment was exacerbated by the expectation that the four largest US AI operators are anticipated to invest over $725 billion this year, creating scrutiny for upcoming corporate earnings to demonstrate a return on these investments. This shift caused a downturn in Asian markets, despite strong earnings reports from major financial institutions which drew investment away from semiconductors to banking, leaving Asia particularly vulnerable to selling pressure.
Geopolitical tensions, specifically renewed Middle East conflicts after US President Donald Trump stated an interim deal with Iran was "over," also weighed heavily on risk appetite. This situation is seen by analysts like Mohit Kumar, chief European economist at Jefferies, as potentially linked to forthcoming midterm elections in November, where Trump might aim for a deal to control oil prices. The escalating hostilities in the Middle East and slumping shipping traffic in the Strait of Hormuz contribute to concerns about energy supplies and inflation.
On the currency front, the MSCI index for emerging markets gained 0.1% for the week. However, most emerging European currencies, including the Polish zloty and Hungarian forint, depreciated against the euro. Poland's central bank indicated higher-than-expected inflation due to the Middle East conflict, and a central banker stated it was too early to decide on a September rate cut. The yen, however, bounced back due to Japan's plans to encourage pension funds to increase domestic financial asset holdings, potentially offering more support than intervention.
In specific market movements, South Korea's KOSPI advanced 2.5%, and Hong Kong's Hang Seng rose 0.6%, marking their sharpest weekly gains in nine months. Polish blue-chip stocks were up 1.5%, Hungary's benchmark added 0.4%, and Romanian stocks edged 0.3% higher. South African equities gained 0.3%, though metal price declines limited the rise, and Turkish stocks added 1.3%. Flows to Indian equity mutual funds rebounded from a one-year low.
