A relief rally in Asian emerging markets sputtered on Tuesday as fresh U.S. strikes on Iran lifted oil prices and rekindled doubts over a swift peace deal.
Stocks in emerging Asia pulled back after hitting a one-week high in the previous session, with some of the weakness driven by profit-taking, after Washington struck Iran even as Tehran's top negotiator and foreign minister were in Doha for talks.
U.S. Secretary of State Marco Rubio said on Tuesday that negotiating a deal with Iran could "take a few days," further quashing hopes of an imminent end to the conflict.
An MSCI gauge of equities in ASEAN countries slipped 0.4%. Singapore's stocks, which accounts for almost half of the index, fell as much as 0.6%.
Shares in the Philippines, Malaysia, and Indonesia also lost between 0.5% and 1%.
"Today's mixed trading reflects a more sober reassessment by markets," said Fakhrul Fulvian, chief economist at Jakarta-based brokerage Trimegah Securities.
"Investors are also starting to differentiate between temporary geopolitical relief and the region's underlying macro vulnerabilities."
Prolonged disruption to oil supplies could upend progress on taming inflation, forcing central banks to keep interest rates higher for longer, or even tighten further, said Ecaterina Bigos, chief investment officer, Asia ex-Japan, at BNP Paribas Asset Management.
Oil-import-dependent Asian economies have been burdened by the sharp rise in energy prices over the past two months, straining their current accounts, driving significant outflows, and pressuring currencies.
Indonesia, the Philippines, and India have stepped up measures to stabilise their exchange rates, while attention now turns to South Korea's central bank, which is expected to hold its benchmark interest rate at 2.50% on May 28.
A Reuters poll shows most analysts now expect the Bank of Korea to hike rates at least once by the end of 2026, as the conflict in Iran adds to inflationary pressures. South Korea's benchmark KOSPI closed at an all-time high after markets reopened following a long weekend.
Chipmakers Samsung Electronics and SK Hynix soared 3.3% and 7.5%, respectively, to record levels. That drove the broader MSCI gauge of EM Asia equities up 1.4% to a record high. It gave up some of those gains, trading around 0.7% higher in afternoon trading.
Sri Lanka's central bank surprised markets with a 100-bp rate hike, lifting the rupee as much as 0.7%, with the currency up about 6% over the past three sessions.
In Southeast Asia, the Indonesian rupiah hit a record low of 17,790 per dollar on concerns over outflows, governance, and export controls, while Jakarta stocks fell over 1%.
The Thai baht weakened 0.4% to around 32.6 per dollar, though stocks rose 0.4% on strong export data and AI-driven demand prospects.
Meanwhile, Taiwan's equities have surged amid the AI boom, lifting the market to the sixth-largest globally, and attracting about $25 billion in inflows so far this year.
HIGHLIGHTS:
** Yield on Indonesia's 10-year bonds at 6.722%
** Taiwan tracks second Chinese drill in a week, deploys jets, ships
** BOJ's Himino says Mideast developments will factor into rate decision - Reuters
