Deteriorating Situation in Iran Interrupts the Surge in Emerging Markets, while Energy Importing Countries' Exchange Rates Face Pressure

Iran suffered a new round of airstrikes that shattered ceasefire expectations, and global emerging market stocks ended a week-long rally, with most currencies weakening.

Bloomberg data shows that the MSCI Emerging Markets Stock Index fell as much as 2.3% during the session, with Asian stocks pulling back from historical highs, and stock indices in Johannesburg, Prague, and Budapest all declined.

The rebound in international oil prices exacerbated the depreciation pressure on the local currencies of oil-importing countries, with the relevant currency index falling by 0.1%. Commerzbank AG foreign exchange analyst Michael Pfister warned that even if the US and Iran eventually reach an agreement, due to the lack of trust between the two sides, the uncertainty in international energy flows will continue, making it difficult for the foreign exchange market to stabilize in the short term.

The South African rand fell 0.7% against the US dollar, and its 10-year Treasury bond yield climbed, with the South African Reserve Bank expected to announce the first interest rate hike in three years, raising the rate by 25 basis points to 7%. In Eastern Europe, the Hungarian forint led the decline due to energy price fluctuations, with the market closely watching the crucial negotiations between Hungarian Prime Minister Peter Magyar and European Commission President Ursula von der Leyen in Brussels.

On the asset allocation front, Amundi SA downgraded its position in Chinese government bonds from overweight to neutral, given the high valuations after the previous sharp rally. In addition, liquidity pressures triggered by conflicts in the Middle East have forced central banks in Asia to respond with policy measures, with Korea's new central bank chief signaling a hawkish turn.

South Korea plans to reduce its long-term government bond issuance by more than one-fifth in June from the previous month to calm yields. Indonesia and Thailand have chosen to increase short-term debt issuance, with the Indonesian central bank issuing additional Indonesian rupiah bills to attract foreign capital inflows and support the local currency exchange rate.