Emerging markets gird for more turmoil

DUBAI: With the world in the grip of 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 even 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 spreads widened by the most since August.

“The week will start horrible, but may improve on central-bank pivots, with a coordinated G-20 fiscal pump not out of the question, ” said Stephen Innes, the Bangkok-based chief market strategist at Axicorp.

“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 last Friday as investors piled into havens, with US Treasury yields dropping to all-time lows and Brent oil prices crashing below US$50 a barrel.

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

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As the virus continued its spread last week, with Latin America and Africa confirming their first cases, expectations grew that the World Health Organisation 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% 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, 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$1.2bil of Eurobonds maturing on March 9.

Malaysia’s central bank will decide today whether to go ahead with a second consecutive interest-rate cut amid the political crisis. The turmoil has cast a pall over a slowing economy and hampers the government’s ability to curb the impact of the coronavirus outbreak.

Fourteen 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%. Former interim Prime Minister Tun Dr Mahathir Mohamad will seek an urgent parliament sitting to show that he has the majority support among lawmakers to be the country’s prime minister instead of Tan Sri Muhyiddin Yassin, who was sworn in Sunday.

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