Emerging market currencies, equities, and bonds joined the global rally in risk assets on Monday, following a provisional agreement between the United States and Iran aimed at restoring transit through the Strait of Hormuz.
Assets in nations reliant on oil imports received the most significant boost as Brent crude fell to its lowest level since March. The Philippine peso and Indonesian rupiah led gains among their peer currencies, while in fixed income markets, Egyptian and Sri Lankan dollar bonds were among the top performers.
The MSCI Emerging Markets Equity Index climbed 2.8%, nearing the record high it reached earlier this month.
"The de-escalation should bring some relief to markets," stated Win Thin, Chief Economist at Bank of Nassau 1982. However, he added, "I must stress that all the thorny issues—frozen assets, sanctions, the nuclear program—have been deferred."
U.S. President Donald Trump indicated the Strait of Hormuz would be open by Friday, though leaders attending the G7 summit did not share his optimistic assessment.
Despite this, JPMorgan upgraded its rating on emerging market currencies to overweight last week, and Wells Fargo noted that Asian currencies, particularly those linked to tech-driven economies, would benefit from improved market sentiment. The prior conflict had driven inflation higher, prompting traders to increase bets on interest rate hikes. The reopening of the Strait of Hormuz improves the outlook for price stability, easing pressure on policymakers.
Investor focus now shifts to a series of upcoming monetary policy decisions this week, including the U.S. Federal Reserve's meeting on Wednesday, the first under Chairman Kevin Warsh. Policymakers in Chile, Brazil, and the Czech Republic are also scheduled to hold rate-setting meetings.
"Inflation challenges in countries like the U.S. and Brazil have not subsided," said Dan Pan, an economist at Standard Chartered in New York. "Markets are likely to remain cautious ahead of these central bank meetings."
The Indian rupee, Indonesian rupiah, and Philippine peso rebounded; these currencies, all from oil-importing nations, had fallen to record lows against the U.S. dollar during the conflict.
Nevertheless, some analysts cautioned that a peace agreement alone is insufficient to erase the economic damage caused by 15 weeks of elevated oil prices, especially in emerging Asian markets, which remain vulnerable to rising energy costs.
"The worst is certainly behind us, and we will see a rebound in emerging market assets," said Eugenia Victorino, Head of Asia Strategy at Skandinaviska Enskilda Banken. "But the war has dealt a heavy blow to domestic economies, and we still anticipate rate hikes from the U.S."
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