Emerging Market Turbulence Amid Political Shifts and Inflation Worries

Emerging market assets fell due to political uncertainties and upcoming U.S. inflation reports and Federal Reserve policy decisions. The MSCI EM equities index and currency gauges dipped by 0.3%. Investors are keenly watching the Fed's rate decision and inflation reports, impacting capital flow and local financial conditions.

Emerging market assets fell on Monday with political uncertainties preoccupying investors after a spate of elections, while U.S. inflation reports and Federal Reserve policy decisions topped this week's watchlist.

The MSCI EM equities index and the currencies gauge slipped 0.3% each after last week's gains. The Chinese stock market was shut due to a public holiday. At the top of investors' radar is the Fed's rate decision due on Wednesday, with a slew of inflation reports throughout the week further shaping the outlook for policy after last week's hot jobs data pointed to a robust U.S. economy.

"High U.S. rates can also exacerbate capital flight out of EMs in favour of the U.S., which will further tighten local financial conditions. A significant number of EMs will be hoping the Fed starts to cut rates soon," said Stuart Cole, head macro economist at Equiti Capital. Mexico's ruling Morena party and its allies won a super-majority in the lower house of Congress but not the Senate, falling just short of the two-thirds majority needed in both houses to change the constitution.

The Mexican peso inched up 0.3% against the dollar in early trade after logging its steepest weekly decline since March 2020. In Central and Eastern Europe, official results reported by the media showed Polish Prime Minister Donald Tusk's Civic Coalition (KO) came first in European Parliament elections.

The zloty was up 0.1% against the euro, which fell sharply on political uncertainty after French President Emmanuel Macron called a snap parliamentary election following his party's big losses to the far right in the EU vote. Hungarian Prime Minister Viktor Orban's Fidesz party was on track for its worst result in a national vote in nearly two decades, where a political newcomer trounced all other opposition parties.

The forint fell 0.2%, leading losses among CEE peers, after Hungarian inflation spiked less than expected, keeping rate cut expectations alive. "In CEE, the far right were kept in check and did not do as well as in some other EU states...The far right certainly made gains and are now more of a force to be reckoned with, but they did not do quite as well as had been feared," Cole added.

Israeli minister Benny Gantz resigned from Prime Minister Benjamin Netanyahu's emergency cabinet, withdrawing the only centrist grouping from the otherwise far-right coalition. While this won't pose an immediate threat of a government collapse, it could leave Netanyahu reliant on hardliners, with no end in sight to the Gaza war and a possible escalation in tensions. Narendra Modi was sworn in as India's prime minister for a third term. Stocks were muted after recouping steep losses made on June 4 following a shock election setback.

HIGHLIGHTS: ** US, Saudi Arabia close to finalizing draft security treaty- WSJ

** Turkey unemployment dips to 8.5% in April ** Egypt inflation decreases to 28.1% in May

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)