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WORLD | 02-03-2020 13:22

After a US$1-trillion wipeout, emerging markets bank on stimulus

With the world reeling from one of the biggest risk sell-offs since the 2008 global financial crisis, more coronavirus-fueled declines in emerging markets may only be tempered by the prospect of coordinated central bank action or large fiscal stimulus.

With the world reeling from one of the biggest risk sell-offs since the 2008 global financial crisis, more coronavirus-fueled declines in emerging markets may only be tempered by the prospect of coordinated central bank action or large fiscal stimulus.

More than US$1.1 trillion was wiped off the value of developing-nation stocks and bonds last week as the economic impact of the coronavirus worsened. Currencies and equities rounded off February with back-to-back monthly declines, while bond spreads widened by the most since August.

On Monday, emerging stocks and currencies reversed some of the losses after the Bank of Japan and Italy’s government announced stimulus measures. Indonesia’s central bank lowered lenders’ reserve requirements to bolster stocks, bonds and currency.

Markets “may improve on central-bank pivots, with a coordinated G20 fiscal pump not out of the question,” Stephen Innes, the Bangkok-based chief market strategist at Axicorp, pointed on Sunday. “Given the tightening of financial conditions due to the stock-market meltdown, the US Federal Reserve will deliver to weaken the dollar. If none of this works, just pray.”

Developing assets tumbled in the five days through Friday as oil prices crashed and investors piled into havens, with US Treasury yields dropping to all-time lows. Little was spared. 

MSCI Inc.’s gauge of emerging equities dropped 7.3 percent, the most since 2011. The Russian ruble, South African rand and Colombian peso all weakened more than 4 percent against the dollar.

As the virus continued its spread, with Latin America and Africa confirming their first cases, expectations grew that the World Health Organisation (WHO) would declare a pandemic. More airlines cut flights to affected regions, while governments increased travel restrictions, shut schools and banned sporting and entertainment events.

China’s manufacturing sector slumped the most on record in February, a report showed on Saturday. The economy was probably only operating at 60-70 percent of normal capacity at the end of last month, according to Bloomberg Economics estimates. Goldman Sachs Group Inc. said the world economy will probably contract on a quarterly basis in the first two quarters of this year.

As if the virus weren’t enough, traders head into the first week of March amid a deepening military standoff between Turkey and Russia in Syria, political turmoil in Malaysia, anti-government protests in Thailand and an upsurge in religious violence in India. Lebanon, meanwhile, may make a decision on whether to default on US$1.2 billion of Eurobonds maturing on March 9.

Malaysian Rates

  • Malaysia’s central bank will decide on Tuesday whether to go ahead with a second consecutive interest-rate cut. The political crisis sparked by Mahathir Mohamad’s surprise resignation as prime minister has cast a pall over a slowing economy and hampers the government’s ability to curb the impact of the coronavirus outbreak

    • Fifteen out of 24 economists in a Bloomberg survey expect a cut of 25 basis points, while the remainder predict it to stay on hold at 2.75 percent

  • On Wednesday, Poland’s central bank is expected to keep interest rates unchanged at 1.5 percent, even as money-market traders increase their bets on easing in the next 12 months

Economic Data

  • Data on Monday showed Asia’s factories took a tumble in February under the weight of the virus, with a severe plunge in activity in China driving down output across the region

    • China’s Caixin Media and IHS Markit purchasing managers’ index dropped to 40.3, its lowest reading since the series began in 2004, according to figures released Monday

  • On Monday, Mexico will release economic activity and Markit PMI manufacturing figures that will give investors a better picture of the flagging economy. Gross domestic product contracted by 0.1 percent in 2019

  • Chile’s economic activity rose the most in four months amid improvements from retail to manufacturing, data on Monday showed. The Imacec index, a proxy for gross domestic product, rose 1.5 percent in January from a year earlier, beating the median estimate of 1.2 percent

  • Data on Tuesday is expected to show Turkish inflation climbed to 12.7 percent, pushing real interest rates further into negative territory

  • In South Africa, the statistics office on Tuesday will reveal whether the nation averted a second recession in as many years in the fourth quarter, and will probably also confirm the weakest annual growth since the global financial crisis

  • Brazil will probably say on Wednesday that its GDP grew by 1.6 percent in the fourth quarter, compared with 1.2 percent in the third. The nation releases PMI data the same day, while inflation figures are due on Monday

  • Argentina on Thursday releases a slew of production figures including construction activity and industrial production

Fed Alert

  • Fed Chairman Jerome Powell stands ready to cut interest rates after saying Friday that the US central bank will “act as appropriate” and that the virus poses “evolving risks” to the US economy

  • About a dozen US policy makers will make public remarks, including six on Friday at a conference in New York to commemorate former Fed economist Marvin Goodfriend

  • Investors will also watch the release of the February employment report on Friday to gauge the labour market’s strength before the virus spread more widely. The Bloomberg survey points to non-farm payrolls gaining 175,000 versus 225,000 the previous month

by Paul Wallace, Lilian Karunungan & Justin Villamil, Bloomberg

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