Emerging Market Currencies Stagnate Amid Escalating Middle East Tensions

Emerging market currencies remained subdued due to fears over intensifying Middle East conflict. Investors leaned towards safe-haven assets, with oil prices rising and MSCI EM stocks index hitting a two-year high. Israeli and Lebanon tensions contributed to uncertain market conditions, impacting currencies like Israeli shekel, Hungarian forint, and Polish zloty.

Emerging market currencies were largely muted on Wednesday as caution over escalating Middle East violence kept investors on edge, while a rally in Hong Kong shares pushed an emerging markets stocks index to an over two-year high.

Israel is beefing up its presence in south Lebanon in its conflict with Iran-backed Hezbollah, a day after being attacked by Iran, raising fears the oil-producing Middle East could be engulfed in a wider conflict. Mohit Kumar, a Jefferies economist, suggested keeping a low risk profile, saying 'geopolitics is impossible to trade'.

The MSCI index for EM currencies fell for the second session, edging 0.1% lower on the day, with the safe-haven dollar hovering around its over one-week high. As the attack re-ignited the allure of safe-haven assets and propped up oil prices, investors are treading tentatively awaiting clarity on how the Middle East situation might unfold - would it be an escalation, or more of a one-off backlash.

'Our base case is that the conflict stops short of an all-out war between Israel and Iran, including their respective allies,' said Mark Haefele, chief investment officer, UBS Global Wealth Management. The Israeli shekel was down another 0.2%, after Tuesday's 1% fall, while the main stock index had lost 1.2% in the prior session.

S&P Global downgraded Israel's long-term ratings to 'A' from 'A+', citing risks to economy and public finances, closely following a two-notch downgrade of Moody's credit rating of the nation. Among other movers, Hungary's forint weakened 0.2% against the euro and touched a near two-month low, while the Polish zloty slipped to an almost three-week low ahead of its local monetary policy decision.

Major Asian currencies were also weak, including the Indonesian rupiah, which hit a multi-week low, and the Thai baht. Stock markets in the Gulf also fell on fears of a wider regional conflict, led by an over 1% fall in Saudi Arabia's benchmark index.

On the flip side, Hong Kong shares rose on continued cheer around China's fresh stimulus measures and easier home purchase rules, lifting the MSCI EM stocks index by over 1%. The Hang Seng index hit its highest level since January 2023, rising for the sixth straight day. Both China and Indian markets were shut for public holidays.

HIGHLIGHTS: ** Kenya's economic growth slows in the second quarter of 2024 ** Ethiopia expects 'tangible progress' on deal with creditor nations by December ** Gradual interest rate cuts appropriate for Philippines, says IMF

(With inputs from agencies.)