EM Stocks Set For Worst Week Since August Amid Mideast Conflict

Figures for various Stock Exchange of Thailand (SET) indices are displayed on an electronic board at the bourse in Bangkok, Thailand, on Monday, Oct. 26, 2020. Thai equities, Asia's worst performers this year, will face another drag from the heightened political tension, which would derail the economic recovery amid the novel coronavirus pandemic, said Pakorn. Photographer: Taylor Weidman/Bloomberg

(Bloomberg) -- Emerging-market stocks are set to post the biggest weekly losses since mid-August as the escalating conflict in the Middle East diminishes chances of a year-end rally.

The benchmark MSCI equity index for developing countries fell for the third day to its lowest since last November, while the average yield on EM hard-currency bonds advanced to the highest since 2020. The Polish currency and bonds bucked the trend, rallying this week as the pro-European Union opposition was set to form the next government, paving the way for unblocking EU funds.

Markets are under pressure as oil is trading above $90 a barrel and gold approached $2,000 an ounce amid attacks on US bases in Iraq and Syria, with Israel's shekel depreciating for the 10th day in a row. Foreign investor outflows from China continued due to concerns about the property sector and the economy's recovery. All in all, EM equity losses for 2023 have exceeded 3%, on track for their third year of declines.

“The risks of an escalation of the Israel-Hamas conflict will likely dampen the conditions for what we expect to be a year-end rally, in our opinion,' said Citigroup Inc. strategists including Eric Ollom in a note to clients. “The risk-off headwinds from the Israel-Hamas conflict, combined with lingering uncertainty over the pace and direction of Fed policy, have so far delayed this lift-off.”

Chinese stocks have slid 16% from a Jan. 30 peak amid relentless selling by global funds, many of whom cite China's ongoing housing crisis and tensions with the West as the biggest worries. A US exchange-traded fund that buys stocks in emerging markets other than China received its single-biggest daily inflows on record. Investors poured $350 million into BlackRock Inc.'s iShares MSCI EM Ex-China ETF on Thursday.

“EM could be hurt if this adds to the already negative growth outlook on China. Weaker Chinese demand is bad for global growth and therefore bad news for cyclical economies, like most EM,” said Henrik Gullberg, a macro strategist at Coex Partners Ltd. “On the other hand, it might result in further measures to stimulate growth in China and then it would eventually be growth/risk supportive.”

The average emerging market sovereign dollar-bond yield has risen 67 basis points in October amid a global selloff sparked by rising US Treasuries. The average yield has risen every day save for two in October to trade at 9.32%, the highest since May 2020.

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