The currencies and stock markets of emerging economies simultaneously plummeted in Asian trading on Monday morning, as concerns about the conflict involving Iran and the surge in oil prices put heavy pressure on risky assets.
The currency index of developing countries fell 0.5%, recording the second consecutive declining session amid a stronger USD. Meanwhile, emerging market stocks at times fell by 1%, the deepest drop in more than two weeks.
Escalating tensions in Iran and spreading throughout the region have disrupted many sectors, from oil, sea transport to aviation. Brent crude oil prices once jumped to their highest level in more than a year before cooling down slightly.
The USD and gold prices simultaneously increased sharply as investors massively turned to safe haven assets. This development continues to put pressure on emerging market currencies, while increasing concerns about inflation.
This is a shock that has significantly weakened emerging markets," said Brendan McKenna, emerging market strategist at Wells Fargo in New York. He said Iran's response this time is more confrontational than before, in the context of the Hoarmuz Strait being almost blocked and military coordination between the US and Israel becoming more intense.
According to Mr. McKenna, this shock, coupled with the fact that assets in emerging markets are being overvalued and held too much at the present time, is likely to trigger a sell-off wave in the early days of the conflict.
Oil-dependent countries such as South Korea, India, the Philippines and Thailand may see their domestic currencies weaken even more, according to Mr. Sim Moh Siong and Mr. Christopher Wong, two strategists at Oversea-Chinese Banking Corp.
Escalating conflict has also pushed stock prices of businesses in the energy, shipping, defense and gold sectors to rise sharply in Asia, while aviation, tourism and growth groups are under deep downward pressure.
Shares of shipping lines such as Wan Hai Lines and Evergreen Marine rose, while Singapore Airlines, Japan Airlines and Eva Airways simultaneously fell sharply.
According to Bloomberg Economics, if the Strait of Hormuz is closed, the conflict could cause oil prices to skyrocket to 108 USD/barrel.
The scale of the current conflict seems very broad and the level of risk is extremely high, especially when Iran confirms that the supreme leader has been killed" - the analysis group led by Dina Esfandiary said - "This confrontation may last longer and be more intense than the 12-day conflict in June".
