Key Takeaways:
The Japanese Yen weakened to a two-week low against the US dollar on Monday, pushing the USD/JPY exchange rate past 159.00 as escalating geopolitical tensions in the Middle East fueled a broad flight to safety.
"The market is set to start the week on a weak note from global cues," said V K Vijayakumar, chief investment strategist at Geojit Investments. "The spike in US 10-year bond yield to 4.62% is another negative factor for EM equity markets. Rupee may further depreciate aggravating the vicious cycle of rupee depreciation and FPI selling."
The risk-off sentiment was evident across markets, with India's Nifty 50 index dropping 1.19% to 23,363 and the Sensex falling nearly 900 points. The India VIX, a measure of market volatility, jumped 2.75% to 19.31, reflecting heightened investor anxiety. The selloff hit emerging-market assets particularly hard, with the MSCI EM Currency index slipping 0.4% for its worst weekly drop since early March.
The currency move is part of a larger market reaction to instability in the Strait of Hormuz, a critical chokepoint for global energy supplies. With about a fifth of the world's oil flowing through the strait, sustained disruption threatens to keep energy prices elevated, complicating the global inflation outlook and pressuring central banks to maintain a hawkish stance.
The primary driver behind the market jitters is the sharp rise in energy prices. Brent crude, the international oil benchmark, jumped 1.83% to $111.26 a barrel after reports indicated no immediate progress in reopening the Strait of Hormuz. This surge in oil prices directly impacts inflation expectations and corporate margins, particularly for major importers like India.
Compounding the pressure, US Treasury yields have climbed, with the 10-year note reaching 4.6%, a level that draws capital away from emerging markets and strengthens the dollar. "Concerns of tighter global financial conditions have taken a toll on the risk appetite towards EM assets,” said Dan Pan, an economist at Standard Chartered Bank in New York, in a recent note.
In response to the uncertainty, investors are rotating into defensive sectors. While most Indian sectoral indices were in the red, with consumer durables and banking stocks leading the decline, defensive pockets showed relative strength. The Nifty IT index was nearly flat, down just 0.02%, while the Nifty Pharma index fell only 0.31%, outperforming the broader market. This indicates a clear preference for export-oriented sectors that are less exposed to domestic economic swings and may benefit from a weaker rupee.
The market's anxiety is magnified by long-term geopolitical forecasts. Moody’s, in its May Global Macro outlook, warned that a full reopening of the Strait of Hormuz is unlikely in 2026. The ratings agency expects major Asian importers like India, China, and Japan to negotiate bilateral transit arrangements with Iran, a process it describes as slow and vulnerable to interruption.
Moody's has cut India’s calendar-year 2026 GDP growth forecast by 0.8 percentage points to 6% and raised its inflation estimate by one percentage point to 4.5%, citing the pass-through from higher energy prices. The assessment suggests that oil markets may operate under a globally fragmented system for the rest of the year, keeping prices volatile and creating a structural constraint on global energy flows.
This article is for informational purposes only and does not constitute investment advice.
