Emerging-market stocks and currencies rallied on Monday as signs of a potential agreement between the United States and Iran to reopen the Strait of Hormuz drove oil prices below US$100 per barrel and heightened investor risk appetite.
Market Performance
MSCI's emerging-market stock index climbed 1.6 percent, marking its third consecutive session of gains and bringing its year-to-date advance to approximately 22 percent. A corresponding gauge for developing-nation currencies strengthened by 0.3 percent. U.S. cash markets remained closed on Monday for the Memorial Day holiday, contributing to thinner trading volumes.
Signs of Progress in Talks
Officials from both Washington and Tehran indicated that the two sides are nearing an interim accord. U.S. President Donald Trump stated on Monday that the negotiations were "proceeding nicely" and urged Saudi Arabia, Qatar, and other nations to join the Abraham Accords, further signaling that a deal may be close. However, discussions on certain issues continued, reflecting the complexity of the negotiations.
"EM currencies are rallying on optimism around a potential Iran deal, amid a drop in oil prices and thin liquidity due to the U.S. market holiday," said Marco Oviedo, senior strategist at XP Investimentos. He cautioned that "the situation is fluid" and negotiations could be delayed or ultimately collapse.
Currency Movements
Most developing-nation currencies advanced against the U.S. dollar. South Africa's rand was among the top performers, benefiting from Brent crude falling below US$100 a barrel, as the rand is a key bellwether for risk sentiment due to its liquidity. Hungary's forint, the most oil-sensitive currency in Eastern Europe, also jumped even though local markets were closed. India's rupee hit its strongest level in two weeks, supported by comments from the country's central bank suggesting the currency may be undervalued.
Caution Remains
Despite the rally, a degree of caution persists in the markets. Maybank strategists, including Saktiandi Supaat, noted in a report that any meaningful price gains across asset classes are conditional upon the actual reopening of the Strait of Hormuz, adding that there have been "plenty of false starts before."
Investors are looking for clear steps from both sides that will lead to a de-escalation between the U.S. and Iran, according to Naomi Fink, chief global strategist at Amova Asset Management. "If we do see this, it's likely that we'll probably continue to see reward in the equity markets," Fink said on Bloomberg TV. She added that stock investors "seem to have downplayed this whole conflict to a surprising extent in favour of the ongoing massive boom in investment."
Overall, the market mood remains cautiously optimistic as traders await concrete developments in the U.S.-Iran negotiations.
