Unknowns Await Emerging Markets After Wildest Moves Since 2008
Cracks are appearing across the emerging-market landscape like never before. Deutsche Bank finds it “too soon to sound the all-clear”. Chile, Egypt central banks to meet after emergency rate cuts.
As most nations brace themselves for a likely surge in coronavirus cases through April, the signals from the developing world could hardly be more worrying for investors. Indexes of stocks, bonds and currencies may have risen in tandem last week as countries from India to Brazil to South Korea and South Africa enacted unprecedented measures to buttress their economies, but the retreat on Friday was a reminder that the turmoil is far from over.
“We find it too soon to sound the all-clear,” Deutsche Bank AG strategists led by New York-based Drausio Giacomelli wrote in a note. Stimulus efforts “are largely insufficient to deal with a prolonged crisis, and it is crucial that current measures suffice to contain the pandemic globally. This remains unknown.”
Rescue measures — and signs of distress — are not yet abating. South Africa, whose debt rating was cut to junk by Moody’s Investors Service on Friday as it grapples with a nationwide lockdown, may approach the International Monetary Fund for the first time to help with funding, Johannesburg’s Sunday Times cited Finance Minister Tito Mboweni as saying. China’s top leaders pledged last week to widen the fiscal deficit and sell sovereign debt, signaling that Beijing is preparing larger-scale stimulus.
The Philippine central bank said Sunday it’s ready to support the economy with more interest rate cuts and purchases of government securities.
Emerging-market stocks had their best week since late 2018 and currencies rallied on the back of global stimulus measures. But a sense of foreboding lingers. JPMorgan Chase & Co.’s gauge of expected price swings in developing-nation currencies is headed for its biggest monthly jump since the height of the global financial crisis in October 2008. Emerging-market stocks are poised for their worst monthly performance since the crisis, too.
“In the large emerging markets of the world economy — the likes of Brazil, Argentina, sub-Saharan Africa, India, Thailand, and Malaysia — the virus has yet to arrive at full strength,” Adam Tooze, a Columbia University economic historian and the author of Crashed, an account of the 2008 crisis, wrote in Foreign Policy. “With their populations at risk, their public finances stretched, and financial markets in turmoil, many emerging-market states and developing countries face a huge challenge.”
Central Banks in Action
The Bank of Korea will provide $12 billion to banks in its first round of dollar injections using a currency swap line with the Federal Reserve
Investors will watch Chile’s central bank meeting on Tuesday for signs of additional monetary easing after an emergency rate cut earlier in MarchCopper production data and retail sales for February released on the same day will show the strength of the strike-hit economy going into the Covid-19 crisis. The nation’s peso has lost the least among Latin American currencies tracked by Bloomberg over the past month
The Central Bank of Egypt will likely keep the benchmark deposit rate on hold on Thursday after already cutting rates by a record 300 basis points at an emergency meeting earlier this month, according to Bloomberg Economics.
Singapore’s Monetary Authority holds an early meeting to set exchange rate policy on Monday. All 16 in the Bloomberg poll see the MAS reducing the slope of its currency band to zero and re-centering the band downwards.
The Reserve Bank of India held an emergency meeting last Friday, slashing policy rates and announcing steps to boost liquidity in a stimulus worth 3.2% of gross domestic product
China’s PMIs likely bounced back in March from record-low levels as the economy slowly restarted after a prolonged virus shutdown
“This would point to the economy passing the nadir,” Bloomberg Economics said. “Even so, the improvement needs to be read with caution. Downside risks are rising as the virus spreads globally”Investors are focusing on whether China’s lockdown has worked, given that production has started and restrictions in Hubei are set to be lifted on April 8
PMI readings from across emerging markets will provide early data on the effect of the coronavirus on economies stricken by lockdowns and a slump in global trade. These include Poland, the Czech Republic, Hungary, Russia, Turkey, Nigeria and Ghana
South Africa’s manufacturing PMI probably fell from 44.3 to 41.1 in March, the lowest in more than a decade, data may show on WednesdayAsia’s Markit PMIs for March will mostly be released on Wednesday, while India’s will come on Thursday. The later impact of Covid-19, compared with China, could see these PMIs further depressed
South Korea reports industrial production on Tuesday, followed by trade data on Wednesday, which will give an early picture of global demand in MarchInflation data are due in Indonesia on Wednesday and in South Korea on Thursday
Brazilian unemployment data for February, due Tuesday, will be watched for early signs of the coronavirus’s impact on the real economy. The nation’s primary budget balance and industrial production numbers for February are due on Tuesday and Wednesday, respectively“My preference is Asia emerging-market currencies, equities and bonds, primarily because of their healthy balance of payment positions, impressive management of the Covid-19 outbreak,” said Nader Naeimi, head of dynamic markets at AMP Capital Investors Ltd. in Sydney. “Latam is attractive from a valuation standpoint, but given the rapid acceleration of the contagion and huge reliance on government backstop, the region is in a precarious position due to its large current-account and budget deficits”Argentina and Lebanon.
Argentina is unlikely to meet its original, self-imposed debt restructuring deadline on March 31, while January economic activity figures on Monday are likely to flag a stagnating economy. The government will report its tax revenue on Friday.
Lebanon kicked off talks to restructure its $90 billion debt pile on Friday with a promise to present a comprehensive recovery plan for its “broken” economy before the end of this year.