Middle East tensions hit risk appetite, emerging market currencies and stocks fall together

According to Zhitong Finance APP, due to the escalating tensions in the Middle East and the upcoming interest rate decision by the Federal Reserve lowering investors' risk appetite, both currencies and stock prices in emerging market countries have declined. On Tuesday, indices tracking emerging market currencies and stocks fell more than 0.4% at one point, but narrowed their losses to 0.1% by the close. Currencies such as the South African Rand, Hungarian Forint, and South Korean Won performed the worst among their peers, with declines against the US dollar exceeding 1%. The Israeli Shekel dropped as much as 0.8% at one point, but later reduced its losses. On Tuesday, Tehran faced a new round of missile attacks. Additionally, U.S. President Trump will meet with the national security team to discuss the conflict, raising speculation about the U.S. possibly joining Israel in its attacks on Iran. According to Antje Praefcke, a senior foreign exchange analyst at Commerzbank, the general risk-averse sentiment due to the tense situation in the Middle East and traders waiting for the Federal Reserve's decision tomorrow has put pressure on emerging market currencies. Praefcke added that the market is also struggling to gain clear signals from the latest U.S. data. Although retail sales fell for the second consecutive month in May, the so-called "control group" sales (which are included in the government's calculation of GDP for goods consumption) rose by 0.4%. The dollar further increased by 0.5%. Brendan McKenna, an economist at Wells Fargo in New York, stated regarding the upcoming Federal Reserve meeting: "We expect tomorrow's meeting to maintain the status quo, but the Federal Reserve may also begin to prepare for a rate cut in September, making this a meeting more inclined towards a 'dovish stance.'" In Latin America, the Colombian Peso outperformed other currencies, while the currencies of Chile and Mexico declined. Chilean officials are expected to maintain the key interest rate later on Tuesday while indicating plans to resume monetary easing due to global adverse factors suppressing economic growth, and local inflation is also trending down towards target levels. Romanian dollar bond prices rose, outperforming most emerging market bonds, as President Nicusor Dan plans to hold formal talks with various political parties to determine a new prime minister candidate. The Bahamas utilized global market financing for the first time in three years, issuing $1.1 billion in bonds maturing in 2036. Despite the tense market situation on Tuesday, fund managers indicated that the rise in emerging markets this year and their strong performance relative to U.S. assets will continue, as the risks brought by this conflict are neither deep nor prolonged. In the fields of bonds, currencies, and stocks, risk indicators are declining, although a war has erupted between Israel and Iran, the market trends are mainly influenced by monetary easing policies, a weakening dollar, and the AI boom Robeco Emerging Markets Equity Portfolio Manager Karnail Sangha stated: "This year and next, the macroeconomic growth performance of emerging markets will continue to outperform other markets. In addition, people are also realizing that international investors must allocate funds to other areas." He also pointed out that the profit levels of emerging market countries are far higher than the expected levels of developed countries