When markets opened Monday, the damage was immediate. By the close, it was worse. The MSCI emerging market currency index posted its steepest decline since November 2024, the dollar surged, and gold topped $5,300. JPMorgan responded by cutting its bullish positioning roughly in half — while carving out a notable exception for Latin America.
A Calibrated Retreat
Strategists Jonny Goulden, Anezka Christovova, and Arindam Sandilya wrote that the initial emerging market reaction to the U.S.-Israel strikes on Iran was negative but limited, creating a window to reduce exposure before uncertainty deepened. The bank halved its overweight recommendations on EM currencies and local bonds, with the possibility of further adjustments on a shorter timeline than usual given the unpredictability of armed conflict.
The specific cuts targeted Europe and the Middle East. JPMorgan halved its bullish calls on the Hungarian forint and Turkish lira — the two currencies that led Monday’s losses — and reduced overweight positions in South African and Romanian local rates. Neutral recommendations on sovereign and corporate credit were maintained, while the bank kept its underweight stance on Middle Eastern assets.
Why Latin America Stands Apart
The region was the clear outlier. JPMorgan maintained its positive view on Latin American currencies and local rates, arguing the region faces lower oil price exposure and benefits from wide interest rate differentials that cushion capital flows during risk-off episodes. In Brazil, Colombia, and Mexico, where central banks kept rates elevated through aggressive tightening, those spreads provide a buffer that Eastern European and Asian peers lack.
Brazil illustrates the dual dynamic. Treasury Secretary Rogério Ceron said the Iran conflict could shorten the upcoming rate-cutting cycle, expected to begin March 17–18 from a Selic rate of 15%. Economists had forecast seven cuts to 12% by year-end. But higher oil prices also boost government revenue through royalties and Petrobras dividends — a silver lining echoing the 2022–2023 dynamic after Russia’s invasion of Ukraine.
The Oil Variable
The scale of the threat depends entirely on duration. Brent crude surged as much as 13% on Monday to $77.77 per barrel, with JPMorgan warning that if disruptions to the Strait of Hormuz extend beyond three weeks, Gulf producers could exhaust storage capacity and be forced to shut in output, pushing prices to $100–$120. Capital Economics estimates that a sustained conflict could add 0.6 to 0.7 percentage points to global inflation. Oxford Economics projects the conflict will last one to three weeks but no more than two months.
Structural Case Intact, for Now
JPMorgan’s strategists stressed that their fundamental thesis has not changed. The structural case for emerging market fixed income remains positive, they wrote, but markets are poorly positioned for this kind of short-term shock, with EM currencies heavily positioned, local rates already pricing in cuts, and credit spreads at elevated levels.
The message amounts to a tactical pause rather than a strategic reversal. For Latin America, the combination of commodity exposure, rate cushions, and geographic distance from the conflict zone may prove to be exactly the insulation investors need. The question is how long the war lasts — and whether oil markets can absorb the answer.