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

Investors began to take profits and reduce risk exposure, leading to a broad decline in emerging market assets on Friday. The drop in gold prices and the ongoing U.S. government shutdown further dampened market sentiment, resulting in a widespread risk-off pattern in Asian markets.

On Friday, the MSCI Emerging Markets Currency Index fell by 0.2%, on track to record a weekly decline, while the stock index dropped by 0.5%. Almost all Asian stock indices fell, except for the Korea Composite Stock Price Index (which was closed on Thursday), with Japanese stocks closing down by 1%.

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

The decline in gold has intensified the atmosphere of "everything is falling," with profit-taking after gold reached $4,000, partly due to easing geopolitical tensions following ceasefire news.

Emerging market assets started the month on shaky ground, with currencies fluctuating within a range, while the unexpected strength of the U.S. dollar challenged market expectations. Despite the ongoing U.S. government shutdown, the dollar is expected to record its best weekly performance since November, and the mainstream trading strategy of shorting the dollar has begun to show cracks.

Gold Retreat Weakens Risk Aversion

The retreat in gold prices has become a key factor dragging down sentiment in emerging markets. Chanana analyzed that profit-taking occurred after gold reached a high of $4,000, while ceasefire news eased geopolitical tensions, weakening demand for safe-haven assets.

Traditional safe-haven assets failed to provide a buffer for emerging markets, instead exacerbating the atmosphere of "everything is falling." In this situation, investors are more inclined to broadly reduce risk exposure.

Strong Dollar Challenges Market Consensus

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

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

The rumors of its demise have been greatly exaggerated, as the question is what alternative options are there? The U.S. remains the world's largest economy, the most dynamic, and has the highest growth rate.

The mainstream trading strategy of shorting the dollar has begun to show cracks, putting pressure on emerging market currencies. The MSCI Emerging Markets Currency Index struggles to find support against the backdrop of a strengthening dollar, fluctuating within a range