Lock in profits after a big surge, gold hits sentiment, everything is falling in emerging markets.

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Investors began to take profits and reduce risk exposure, leading to broad declines in emerging market assets on Friday. Gold prices fell and the ongoing U.S. government shutdown further dampened market sentiment, with Asian markets exhibiting widespread risk-off behavior.

On Friday, the MSCI Emerging Markets Currency Index fell by 0.2%, poised for a weekly decline, while the equity index dropped 0.5%. Except for South Korea’s KOSPI (which was closed on Thursday), almost all Asian stock indices declined, with Japanese stocks closing down 1%.

Charu Chanana, Chief Investment Strategist at Saxo Markets, stated:

The drop in gold exacerbated the “everything is falling” atmosphere. Profit-taking occurred after gold touched $4000, partly due to easing geopolitical tensions following ceasefire news.

Emerging market assets have had an unstable start this month, with currencies fluctuating in ranges and the unexpectedly strong dollar challenging market expectations. Despite the ongoing U.S. government shutdown, the dollar is set for its best weekly performance since November, with cracks appearing in the year's most popular trade of shorting the dollar.

Gold Pullback Weakens Safe-Haven Sentiment

The retreat in gold prices has become a key factor dragging down sentiment in emerging markets. According to Chanana, profit-taking occurred after gold touched the $4000 high, and ceasefire news eased geopolitical tensions, reducing demand for safe-haven assets.

Traditional safe-haven assets failed to provide a buffer for emerging markets, instead intensifying the “everything is falling” mood. In this context, investors are inclined to broadly reduce risk exposure.

Strong Dollar Challenges Market Consensus

Despite the ongoing U.S. government shutdown, the dollar remains strong and is on course for its best weekly performance since November. The Bloomberg Dollar Spot Index fell 0.1% on Friday, but remains robust for the week overall.

Christopher Rossbach, Chief Investment Officer at J Stern & Co LLP, stated on Bloomberg TV:

Reports of its demise are much exaggerated, because the question is, what alternatives are there? The U.S. is still the world’s largest economy, most vibrant, and has the highest growth rate.

The most popular trade this year, shorting the dollar, has started to show cracks, putting pressure on emerging market currencies. The MSCI Emerging Markets Currency Index is struggling to find support amid a strong dollar, fluctuating within a range.

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