Tension in the Middle East hits investor sentiment, causing both emerging market currencies and stocks to fall.

Due to the escalating tension in the Middle East and the upcoming interest rate decision by the Federal Reserve lowering investors' risk appetite, the currencies and stock prices of emerging market countries have all declined. On Tuesday, indices tracking emerging market currencies and stocks both fell by more than 0.4%, but narrowed their losses by the end of the trading session, each falling by 0.1%. Currencies such as the South African rand, the Hungarian forint, and the South Korean won performed the worst among their peers, with exchange rates against the US dollar falling by over 1%. The Israeli shekel also fell by as much as 0.8% at one point, but later narrowed its losses. On Tuesday, Tehran was hit by a new round of missile attacks. Secondly, US President Trump is set to meet with his national security team to discuss the conflict, sparking speculation about the US possibly joining Israel in attacking Iran. According to Commerzbank senior forex analyst Antje Praefcke, the prevailing risk-off sentiment due to tensions in the Middle East and traders awaiting the Fed's decision tomorrow has put pressure on emerging market currencies. Praefcke added that the market is also struggling to get a clear signal from the latest US data. Despite retail sales falling for the second consecutive month in May, the so-called "control group" sales (which are included in the government's calculation of GDP consumer goods) increased by 0.4%. The US dollar further rose by 0.5%. New York Mellon Bank economist Brendan McKenna commented on the upcoming Federal Reserve meeting, saying, "We expect tomorrow's meeting to maintain the status quo, but the Fed may also start preparing for a rate cut policy in September, which will be more inclined to a 'dovish stance' meeting." In Latin America, the Colombian peso outperformed other currencies, while the currencies of Chile and Mexico saw declines. It is expected that Chilean officials will maintain key rates unchanged later on Tuesday, while indicating plans to resume loose monetary policy, as global adverse factors have hampered economic growth, and local inflation is returning to target levels. Romanian dollar bonds rose, outperforming most emerging market bonds, as President Nicusor Dan plans to hold formal talks with various parties to determine the new prime minister. The Bahamas utilized global market financing for the first time in three years, issuing $1.1 billion in bonds due in 2036. Despite the tense market situation on Tuesday, fund managers indicate that the upward trend in emerging markets this year, and their outstanding performance relative to US assets, will continue, as the risks brought by this conflict are neither deep nor long-lasting. Risk indicators in bonds, currencies, and stocks are declining, and while a war between Israel and Iran may erupt, market trends are driven mainly by loose monetary policy, a weakening US dollar, and the artificial intelligence boom. Robeco's emerging markets equity portfolio manager Karnail Sangha said, "This year and next, emerging markets' macroeconomic growth performance will still outperform other markets. Additionally, 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 expected levels in developed countries.