(Bloomberg) -- A gauge for emerging-market stocks rose for a second day as investors grew optimistic over an easing of hostilities in the Middle East after Israel and Iran calibrated their responses in the latest round of attacks. Some currencies were weighed down by the subsequent drop in oil prices.
The MSCI equity gauge closed 0.3% higher but is still on track for its biggest monthly loss since January. Its companion gauge for currencies was down less than 0.1% and headed for the sharpest monthly decline since February 2023.
Brent crude-oil futures slumped as much as 6.4% and Citigroup Inc. cut its 12-month price forecast for the blend to $60 per barrel, saying the risk premium for geopolitical tensions was fading. The move followed Israel’s assault on Iran early Saturday, which was more restrained than many had expected. Investors wagered the various players in the conflict will become more keen on diplomatic efforts to return hostages and curb the fighting.
But the improved risk environment is not necessarily helping foreign currency markets, according to Monex Inc.
“Commodity-based currencies are bearing the brunt of the burden today after oil prices fell dramatically overnight,” said Helen Given, foreign-exchange trader at Monex. “All EM assets continue to trade choppy on high international risk premiums ahead of such a busy economic week out of the US.”
Israel’s shekel rose the most in the world against the dollar, bolstered by the fading political tensions. Elsewhere, the Japanese yen pared losses after falling as much as 1%, with traders weighing the implications of the ruling Liberal Democratic Party and its coalition partner losing their majority in an election upset.
While sentiment on the geopolitical front improved, economic concerns driven by China continued to mount. A weekend release showed industrial profits plunged 27% in September from a year earlier, deepening deflationary pressures in the world’s second-biggest economy.
The data showed the hundreds of billions of dollars in monetary stimulus aren’t yet helping to revive the Chinese economy. Investors clamoring for fiscal stimulus now await a meeting of the country’s top legislative body from Nov. 4 to 8 to see if their demands will be met.
Traders will also watch for key US economic data this week for clues ahead of the Federal Reserve’s next meeting. While the Fed’s easing expectations have steadied, investors remain nervous about the outcome of next week’s US presidential election. For emerging markets, a win for Donald Trump could be seen as risky, as he has pledged to raise import tariffs.
Citigroup reduced all of its Latin America exposure, saying that risk aversion tends to peak a week before the US election. “Market consensus already incorporates higher chances of a Trump victory, making the risk-reward of keeping the trades less appealing,” strategists led by Ivan Riveros wrote in a note.
Meanwhile, Colombia is selling global bonds and the Slovak Republic hired banks for an international bond sale, in what’s shaping up to be a busy week for emerging issuers. Among corporates, Grupo Aeromexico SAB is tapping the international debt market to raise as much as $1.1 billion that the Mexican airline will use to refinance existing notes.
Elsewhere, investors watched Georgian assets as the country was plunged into a political crisis — with the ruling party declaring victory in an election that the opposition says was rigged in favor of Moscow.
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