Asian emerging market stocks retreated from record highs Thursday as U.S. and Iranian air strikes intensified fears of escalating conflict and oil flow disruptions through the Strait of Hormuz.
The MSCI index of EM Asia equities dropped more than 2% in its worst session in more than a week, as AI-linked stocks in South Korea and Taiwan fell from recent highs.
Singapore's FTSE Straits Times index fell about 0.7%, while stocks in Thailand and the Philippines shed between 1% and 1.8%. China's blue-chip CSI300 Index was flat.
"Markets had moved too fast, pricing geopolitical optimism. Now investors are partially unwinding those trades while waiting for actual diplomatic progress instead of speculative headlines," said Fakhrul Fulvian, chief economist at Trimegah Sekuritas Indonesia.
Renewed air strikes by the U.S. and Iran sent oil prices surging again, underscoring the fragility of the ceasefire between Washington and Tehran and dimming hopes for a peace deal.
The oil supply disruption due to the closure of the Strait of Hormuz has ignited inflation fears in countries dependent on oil imports, straining their current accounts and forcing a hawkish tilt in central banks across developing economies to stabilise their currencies.
Meanwhile, South Korea's KOSPI index fell as much as 4% from its record peak, although it recouped most losses to end the day 0.5% lower. The won eased around 0.2% after the Bank of Korea held interest rates as expected, and signalled a hawkish tilt.
Taiwan's benchmark stock index, another tech-heavy gauge, scaled a lifetime high during the session but reversed course to end the day 1.4% in the red, as the flare-up of attacks in the Middle East soured risk appetite.
The pullback followed a 10.6% rally over the previous five sessions, fuelled largely by strong AI-related inflows.
Additionally, Bloomberg reported that Taiwan Stock Exchange is considering extending trading hours to capitalise on the AI-driven rally and boost emerging market inflows.
"Investors are currently caught between improving AI-driven optimism and lingering uncertainty surrounding global macro and geopolitical conditions," Fulvian said.
Asian currencies faced pressure as the dollar index hit a one-week high, driven by fading hopes of a quick conflict resolution, ahead of the Fed's preferred inflation data release.
The Philippine peso slipped 0.4% to 61.61 per dollar, not far from its all-time low of 61.753, while the Thai baht and the Malaysian ringgit also edged down.
Markets in Indonesia and India were closed for a public holiday.
HIGHLIGHTS:
** Yuan slips as US-Iran tensions cloud outlook for peace deal
** Japan's Nikkei struggles for direction as tech valuations, Iran conflict weigh
** Any conflict over Taiwan would risk U.S.-China nuclear escalation, study finds
** Rupiah bears most entrenched since 2022 as Asia FX split widens - Reuters
