EM stocks slide as U.S.-Iran strikes compound Fed fears

U.S. airstrikes on Iran and Iranian retaliatory missile fire at Bahrain, Kuwait and Jordan rattled markets in a second day of escalation this week, according to the AP.apnews
South Korea’s KOSPI fell sharply Wednesday after Monday’s circuit-breaker crash, while Taiwan’s TAIEX extended losses from its third-heaviest single-day decline.tradingeconomics
Bank Indonesia bucked the trend with a surprise off-cycle rate hike to 5.50% aimed at stabilizing the rupiah amid Middle East-driven volatility, according to Reuters.reuters

EM Stocks Fall as US-Iran Strikes Dampen Risk Appetite

The MSCI Emerging Markets Index fell sharply on Wednesday as renewed military exchanges between the United States and Iran rattled investors and clouded prospects for a diplomatic resolution to the conflict, extending a bruising stretch for risk assets that began when hawkish Federal Reserve expectations triggered a global tech sell-off last week.

Geopolitical Shock Deepens Losses

The United States launched airstrikes against multiple targets in Iran early Wednesday after blaming Tehran for downing an American Apache helicopter near the Strait of Hormuz on Monday, according to the Associated Press. Iran responded by firing missiles at Bahrain, Kuwait, and Jordan — all of which host U.S. troops — marking the first time Iran has targeted Jordan since the ceasefire began in April. The escalation was the second round of tit-for-tat strikes this week after Iran and Israel targeted each other on Monday.apnews

South Korea’s Kospi dropped roughly 4.5% on Wednesday, according to Trading Economics data, building on Monday’s 8.3% plunge that triggered circuit breakers. Taiwan’s TAIEX lost 3.3%, extending losses from its third-heaviest single-day point decline recorded Monday. Both markets are heavily exposed to the semiconductor and AI hardware sectors that have driven emerging market outperformance this year but have come under pressure as rising bond yields challenge stretched valuations.reuters

AI Rally Stalls as Rate Fears Mount

Reuters reported that the AI rally “may have finally met its match” in the Federal Reserve, after strong U.S. jobs data lifted expectations for a rate hike by December. Citi strategists warned that their global “bear market checklist” is at its most inflated level since the 2008 financial crisis. The MSCI Emerging Markets index had returned over 51% on a trailing twelve-month basis through the end of May, powered largely by Korean and Taiwanese chipmakers riding insatiable demand for AI infrastructure.reuters

Indonesia Bucks the Trend

Indonesian assets stood out as a rare bright spot. Bank Indonesia on Tuesday unexpectedly raised its benchmark rate by 25 basis points to 5.50% in an off-cycle move aimed at stabilizing the rupiah, which had hit a series of record lows. The central bank called the hike “a proactive measure to enhance the rupiah’s exchange rate stability against the backdrop of heightened global volatility due to the Middle East conflict”. Local equities rallied in response, with analysts at Barclays suggesting the central bank may implement consecutive rate hikes akin to its 2013 tightening cycle.reuters