Emerging market stocks and currencies are experiencing continued pressure as a lack of progress in US-Iran negotiations has driven oil prices above $86 a barrel. MSCI’s emerging foreign exchange gauge has shown a second consecutive day of decline against the dollar, with oil-importing Asian countries seeing the most significant losses. The Philippine peso fell 0.4%, followed by the Thai baht, Indonesian rupiah, and Korean won.
UBS Group AG strategists note that the reluctance of emerging central banks to raise interest rates, combined with the economic strain from higher oil prices and elevated US yields, is creating a challenging environment for emerging market capital flows and currencies. They suggest that sustained US interest rates at current levels until year-end would be necessary for broader emerging market currency performance in the coming one to three months.
While emerging market growth has largely withstood the energy shock to date, the resilience of the US economy is challenging growth differentials. In other market segments, the South African rand found some support from gold prices hovering near $4,000 an ounce, although rising oil costs limited further gains. The Hungarian forint stabilized against the euro, recovering from an earlier 0.4% loss. Korean stocks, however, added 1.6%, recouping some of Monday’s 5% slide.
