The value of currencies in emerging markets has recently hit its lowest point in over two months, driven by escalating geopolitical tensions and a growing inclination towards risk aversion, spurred by changes in the United States' interest rate outlook.
In a climate where investors are gravitating towards safer assets like gold and the US dollar, currencies such as the Hungarian forint and the Israeli shekel have seen significant underperformance.
This downtrend in currency values comes amid a global reassessment triggered by new US inflation data, alongside heightened concerns over increased conflict in the Middle East. Additionally, the escalation of Russian military actions in Ukraine is raising alarms about the potential weakening of Kyiv's defense capabilities.
According to Francesco Pesole of ING Bank, geopolitical dynamics, particularly the tension between Iran and Israel, could lead to a surge in oil prices, thereby indirectly strengthening the dollar in the short term.
The MSCI index for emerging market stocks also experienced a decline, dropping by 0.9%. However, a sub-index tracking commodity-related stocks is on an upward trend for the fourth consecutive week, benefiting from rising energy and raw material prices.
Further dampening market sentiment, recent data revealed a significant drop in China's exports for March. This decline challenges the optimism that strong international sales could compensate for domestic demand weaknesses and stimulate growth in the world's second-largest economy.
Bond yields in Eastern Europe's major emerging markets have reached their peak this year, influenced by the global shift in rate expectations. However, there was a slight easing in borrowing costs, with Hungary's 10-year yield retreating from the 7% threshold and Poland's yields also showing a decrease.
Bank of America analysts, led by David Hauner, express caution towards emerging-market bonds and currencies, attributing their stance to concerns over interest rates and overcrowded trades. They suggest a potential increase in exposure to emerging market risks in May, ahead of the June FOMC data release.
With the ongoing adjustments in global financial markets, investors and strategists are closely monitoring developments, staying cautious of potential volatility in emerging market currencies and bonds.
