High Yielders Pace Emerging-Market Currency Gains, Stocks Jump

(Bloomberg) -- Emerging-market currencies were mixed on Tuesday, with high-yielding names outperforming as investors looked past the latest developments in the Middle East and focused on carry trades instead.

Colombia and Brazil, which offer some of the highest real interest rates across the developing world, saw their currencies lead gains, even as a broad MSCI Inc. gauge ended the day little changed. 

“Oil exporters with high carry seem to be outperforming in an environment marked by higher oil prices and US rates,” said Dan Pan, Americas economist at Standard Chartered Bank. “Risk sentiment seems to have improved a bit although it remains selective.” 

Low volatility is driving demand for high yielders like the Brazilian real, Colombian peso and some smaller frontier markets, according to David Hauner, a global emerging-markets strategist at BofA Securities. The strategy, which involves borrowing in low-yielding currencies to invest where returns are higher, has proven a winner in 2026 as the global economy remains unexpectedly resilient in the face of the oil shock spurred by the Iran war. 

What’s more, “if the Middle East uncertainty is the new norm, the market cannot stay on the sidelines forever and eventually needs to find value somewhere,” Pan said.

The US and Iran exchanged strikes for a 10th consecutive day even as mediators sought to revive a truce, while the Houthi militant group in Yemen threatened shipping in the Red Sea. The US Central Command said it targeted Iranian military command centers, launch sites and air defenses overnight, and Iran attacked sites in Kuwait and Jordan, with Kuwait saying power and desalination plants were among those hit. 

Meanwhile, emerging-market stocks rebounded following three days of losses after China mounted a state-sponsored rescue program for its tech shares. MSCI’s benchmark emerging share index jumped 2.3%, for its best day since mid-June. 

BlackRock’s $28.5 billion iShares MSCI Emerging Markets ETF, or EEM, saw its first inflow since February — of $427 million — on Monday, according to data compiled by Bloomberg. EEM tracks a basket of developing-nation equities, and notably includes South Korean stocks as part of that exposure, unlike other peer funds.

On the monetary policy front, Hungary’s central bank reiterated that there’s room to reduce interest rates further if favorable inflation trends persist. The authority cut its benchmark by a quarter point to 5.75% on Tuesday, as expected by analysts. And Nigeria’s central bank held interest rates as expected to curtail price pressures from the Iran war, which it described as the biggest risk to its outlook.

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