No reprieve for emerging markets with rout in virus-hit China


  • Economy
  • Monday, 03 Feb 2020

Street view after Wuhan government announced to ban non-essential vehicles in downtown area to contain coronavirus outbreak, on the second day of the Chinese Lunar New Year, in Wuhan, Hubei province, China January 26, 2020. — Reuters

FRESH from their worst month since August, emerging-market stocks and currencies are headed for more tumult as investors weigh the economic shocks from the coronavirus outbreak.

China’s yuan and stocks plunged on Monday, while bonds gained as onshore financial markets reopened for the first time since Jan. 23 after the extended Lunar New Year holidays. The nation’s central bank sought to soften the selloff through injections of liquidity into the money market and cutting borrowing rates.

A sense of foreboding is spreading through emerging markets on concern that the virus, which has killed more than 360 people and sickened thousands, could crimp global growth.

MSCI Inc.’s index of developing-nation equities sank below its 50- and 100-day moving averages last week, heralding further declines from a 1 1/2-year peak reached in mid-January.

The CBOE Emerging Markets ETF Volatility Index rose in January by the most since October 2018. JPMorgan Chase & Co.’s gauge of expected price swings in developing-nation currencies climbed Monday to the highest in almost two months.

"The coronavirus is an unquantifiable risk and precedents like SARS may not be that helpful because of China’s greater economic size, consumption share, and global integration compared to 2003, ” said Hasnain Malik, the Dubai-based head of equity strategy at Tellimer.

"Investors, particularly after a year of good returns, are naturally going to be very sensitive to worsening data on infection and deaths, regardless of stimulus measures for the economy.”

A slew of central-bank meetings in developing economies this week will likely offer clues on the potential impact of the virus on growth and monetary policy. Russia, Brazil and the Philippines will probably cut their benchmark interest rates.

China set its daily yuan reference rate stronger than the key 7-per-dollar levelThe People’s Bank of China supplied 1.2 trillion yuan ($172 billion) to money markets on Monday, which came up to 150 billion yuan on a net basis, according to calculations by Bloomberg.

China also reduced borrowing costs on the funds by 10 basis pointsAmong data out on Monday, profits at Chinese industrial enterprises dropped in December, before the Lunar New Year holiday and a deadly pneumonia outbreak caused an extended shutdown of industry

Philippine policy makers will probably lower their benchmark interest rate to 3.75% from 4% on Thursday, economists predict.

Bangko Sentral ng Pilipinas Governor Benjamin Diokno said on Jan. 30 a 50-basis-point cut remains on the table this year following a reduction of 75 points in 2019.

On Friday, the Bank of Russia will make its first rate decision since President Vladimir Putin revamped Russia’s government last month. The majority of economists surveyed by Bloomberg expect a 25 basis-point cut to 6%.

Brazil’s central bank is expected to lower rates by 25 basis points on Wednesday. Investors will also watch industrial production data on Tuesday and inflation figures on Friday for signs about the economy’s health. The real dropped to a record low on Friday and is the third worst-performing currency in emerging markets in 2020.

Bank of Thailand is set to maintain its key rate at a record-low 1.25% on Wednesday. Capital Economics predicts the central bank will ease as Thailand is among those most vulnerable to a sharp drop in Chinese tourist arrivals due to the virus outbreak.

The Reserve Bank of India will likely hold its benchmark at 5.15% on ThursdayBloomberg Economics expects the central bank to resume rate cuts in April as food inflation cools; India’s domestic bonds have advanced a second month in January, according to a Bloomberg Barclays index.

Indian Prime Minister Narendra Modi’s second budget in seven months disappointed investors who were hoping for big-bang stimulus to revive growth in Asia’s third-largest economy. The plan proposed tax cuts for individuals and wider deficit targets, but failed to provide specific steps to fix a struggling financial sector, improve infrastructure and create jobs.

Czech rate setters will probably keep interest rates unchanged at a meeting on Thursday, even if the debate around the need for further monetary policy tightening has intensified after an upside surprise in inflation data.

Poland’s central bank concludes a two-day rate meeting on Wednesday, with all of the economists in a Bloomberg survey expecting it to stay put at 1.5%.

On Monday, Colombia’s central bank will release minutes from its January meeting, which may offer guidance on the bank’s less dovish outlook. The nation will also post inflation data for the same month on Wednesday. Its peso fell for four straight weeks in January. - Bloomberg

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