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EM Review: Global Virus Spread Hammered Demand for Risk Assets

EM Review: Global Spread of Virus Hammers Demand for Risk Assets

(Bloomberg) -- Emerging-market stocks posted their biggest weekly loss since 2011 last week and currencies skidded as the coronavirus spread around the world from South Korea to Iran and Brazil. Currencies and equities posted back-to-back monthly declines and bond spreads widened by the most since August.

The following is a roundup of emerging-markets news and highlights for the week ending March 1.

Read here our emerging-market weekly preview, and listen here to our weekly podcast.

Highlights:

  • The emergence of new centers of coronavirus infection outside of China is fueling concern the outbreak could become a global pandemic

    • More new cases were reported in countries other than China for the first time, the World Health Organization said
    • South Korean cases of the virus exceeded 2,000, while Nigeria confirmed the first case in Sub-Saharan Africa. Brazil confirmed the first coronavirus case in Latin America, sending currencies in the region into a tailspin, and Mexico also reported a case
    • South Africa’s government will quarantine dozens of citizens who’ve asked to be repatriated from Wuhan, China
    • Federal Reserve Chairman Jerome Powell said the coronavirus “poses evolving risks” to U.S. economic growth and signaled the central bank is prepared to cut interest rates if necessary to support the country’s longest-ever expansion
    • Brazil’s government is likely to cut its 2.4% growth forecast for the economy in 2020 to take into account the impact of the coronavirus in slowing global activity, a person familiar with the matter said
    • Central and local governments in China are loosening the criteria for factories to resume operations as they walk a tightrope between containing the virus and preventing a slump in the economy
    • While President Donald Trump sought to reassure Americans on Tuesday that the outbreak poses little threat, the Centers for Disease Control and Prevention warned hours later to prepare for the disease to disrupt daily life in the U.S. The nation’s health authorities said they’ve identified the first case of virus that doesn’t have known ties to an existing outbreak
    • Trump is seeking to close ranks within his administration about the threat posed by the coronavirus and how the U.S. government plans to stop its spread
    • China’s currency is showing strength against peers, despite the country being most affected by the epidemic
    • Click here for virus updates
  • China’s economy could be heading for a worse-than-expected first-quarter contraction after the country’s manufacturing sector reported activity was at a record low in February
    • A range of early indicators of China’s economy in February confirm that the coronavirus outbreak has crippled production and consumption, as factories remain below capacity and transport is curtailed
  • Oil prices fell the most since 2008, while Saudi Arabia pushed Russia to accept more supply cuts from OPEC+
    • Russia is ready to cooperate with its OPEC+ partners to support the world oil market, even though it’s comfortable with current crude prices, President Vladimir Putin said
  • Benchmark stock indexes in Thailand and Malaysia entered a bear market, while those in Indonesia and the Philippines are close
  • Malaysian Prime Minister Mahathir Mohamad abruptly submitted his resignation to the king on Feb. 24 and his party exited the ruling coalition
    • Mahathir is planning an urgent confidence vote in parliament to show he has the numbers to form a government instead of Muhyiddin Yassin, who was sworn in Sunday
    • The political upheaval is jeopardizing the economy’s outlook at a time of heightened global risks and brewing discontent among locals about rising living costs
    • Speaking of EM: Malaysia’s Crisis is Terrible Timing (Podcast)
  • The Bank of Korea downgraded its growth forecast for the year on Thursday amid mounting evidence of an economic hit from the coronavirus, but unexpectedly left its key interest rate unchanged
  • Tensions soared between Turkey and Russia after an airstrike in Syria killed at least 33 Turkish soldiers, prompting Ankara to seek military support from allies and threaten to unleash a new refugee exodus to Europe
    • Turkey shot down two Syrian SU-24 warplanes and destroyed three Syrian air defense systems
    • Turkey told millions of migrants and asylum seekers hosted on its soil that it won’t stand in the way if they want to leave. Turkey said more than 100,000 refugees have left
    • Turkish assets nosedived
Asset Moves Last Week:WeeklyFebruary
MSCI EM stocks index-7.3%-5.4%
MSCI EM FX index-0.6%-1.5%
Bloomberg Barclays Global EM Local Currency bond index-0.3%-0.3%

Asia:

  • China’s central bank is reviewing whether to cut the benchmark deposit rate due to the virus outbreak, Deputy Governor Chen Yulu said
    • Central bank said it will place more emphasis on keeping monetary policy flexible
  • South Korean President Moon Jae-in asked his secretaries to consider drafting an extra budget with parliamentary approval if needed
    • South Korea is monitoring foreign-exchange market particularly and will take necessary measures should the exchange rate lean in one direction excessively due to speculative trade, Vice Minister Kim Yongbeom said
    • Moon’s disapproval rating rose to 51%, the highest level since the third week of October, from 46% a week earlier, a Gallup Korea poll showed
    • Consumer and manufacturers’ confidence slumped the most in five years
    • South Korea broke its own record for the world’s lowest fertility rate
  • India’s economy slowed to a more than six-year low in the final three months of last year

    • Trump and Indian Prime Minister Narendra Modi have agreed to “promptly conclude” trade negotiations in an effort to reach a phase-one agreement, according to a joint statement released by the White House following Trump’s visit in India
    • The U.S. will sign military deals worth more than $3 billion with India on Tuesday, Trump said at the start of the two-day state visit
    • The Reserve Bank of India will start an internal review of its monetary policy framework in June
    • The central bank may unveil another European Central Bank-styled facility called Targeted Longer-Term Refinancing Operations to expand credit to businesses and households, after concluding an ongoing program to lend $14 billion at the policy rate, according to Standard Chartered Plc and Nomura Holdings Inc.
  • Bank Indonesia stepped up its market intervention by boosting dollar supplies and purchasing government securities from the open market as investors dumped the nation’s currency, stocks and bonds
    • The government plans to take fiscal measures to support economic growth, according to President Joko Widodo
    • Indonesia unveiled a raft of fiscal incentives for its tourism, airline and housing sectors hit by the virus outbreak
    • Budget deficit is seen slightly widening from the “quite conservative” 1.76% of gross domestic product estimated in the state budget due to the weakening economy and falling tax revenue, according to Finance Minister Sri Mulyani Indrawati
    • Bank Indonesia and the government will maintain accommodative policy mix, according to Senior Deputy Governor Destry Damayanti
    • Widodo and Trump plan to discuss the Southeast Asian nation’s new capital during the U.S.-Asean Summit in Las Vegas. Indonesia is ready to seek parliamentary approval for a bill to accelerate the construction of a new capital that’s drawn interest from investors across the world
  • A slump in Thailand’s foreign tourism income underlines the damage being inflicted on its economy by the coronavirus outbreak
    • Exports unexpectedly increased 3.4% on year in January while imports decreased by less-than-expected 7.9%, leaving trade deficit of $1.6 billion
    • Thailand is looking at further measures to control the coronavirus outbreak, its Health Minister Anutin Charnvirakul said
    • Thailand’s King Maha Vajiralongkorn has approved the annual government budget, according to a Royal Gazette statement
    • January current-account surplus narrowed to $3.44 billion from the previous month, in line with lower trade surplus, according to the Bank of Thailand’s statement
  • Taiwan’s financial institutions should cope with the risk of potential Libor exit in 2022 cautiously, Taiwan’s central bank said
    • The cabinet approved a special budget of NT$60 billion ($2 billion) and will seek legislature’s approval on the plan to limit the impact from the coronavirus
  • Philippine central bank Governor Benjamin Diokno said authorities may consider more than 50 basis points in policy rate cuts, exceeding the initial plan for this year, if economic conditions worsen amid the virus outbreak

    • Government spending climbed to a record a month before the outbreak
    • The government is looking into proposals to revive the country’s manufacturing sector, according to Trade Secretary Ramon Lopez
    • The Philippines posted a budget deficit of 660.2 billion pesos ($13 billion) in 2019, wider than 558.3 billion pesos a year ago. It exceeded its full-year deficit target of 620 billion pesos
    • Bangko Sentral ng Pilipinas expects February inflation at a range of 2.4% to 3.2%, compared with 2.9% in January
    • The Philippines and the U.S. are considering a new military pact similar to the Visiting Forces Agreement which President Rodrigo Duterte ordered terminated

EMEA:

  • The ruble’s exposure to fallout from the coronavirus was on full display Tuesday as local markets reopened after public holidays. Some strategists predicted deeper losses following crude oil’s slide
    • Investors who took home 34% returns on Russian local-currency bonds last year are increasing their bullish bets after Central Bank Governor Elvira Nabiullina signaled more rate cuts
  • A sharp slowdown in South Africa’s economic growth and mounting demands for support from financially distressed state-owned companies will result in the highest budget deficit in a generation
    • The shortfall as a percentage of GDP is forecast to widen to 6.8% in the fiscal year through 2021, according to the National Treasury’s annual Budget Review
    • The country will use money from the sale of broadband spectrum and mining royalties to establish a 30 billion-rand ($2 billion) sovereign wealth fund, Finance Minister Tito Mboweni said at the presentation of the national budget
    • The leadership of South Africa’s ruling party called an emergency meeting to discuss the government’s plans to curb its wage bill -- a move that has angered its labor-union allies
    • Uncertainty over success of negotiations with labor unions to reduce the wage bill, and potential contingent liabilities from state-owned enterprises, mean risks to budget forecasts are elevated, Lucie Villa, vice-president and senior credit officer at Moody’s Investors Service, said in a report
  • Turkey’s central bank is bearing the brunt of an effort to shore up the lira and the costs are starting to add up. From a peak in late December, its net foreign-currency reserves have dropped around $9 billion, according to Bloomberg calculations using official data
    • The economy grew 1.9% in the fourth quarter compared to previous period and 6% from a year earlier
  • Economic growth in the United Arab Emirates is estimated to have accelerated last year, but mostly because of oil. The Middle East’s second-biggest economy expanded at the slowest pace since at least 2011, according to central bank forecasts
  • The Bank of Israel held off on cutting interest rates on Monday, opting to maintain its policy of foreign-currency purchases instead of pushing borrowing costs even closer to zero
  • Saudi Arabia’s ousted former Energy Minister Khalid Al-Falih returned to government on Tuesday, taking on a key new portfolio as the kingdom seeks to win back foreign investors
  • Nigeria’s economy expanded 2.3% in 2019, the most in four years, as oil output increased and the central bank took steps to boost credit growth
    • S&P changed its outlook on the country’s rating of B to negative
  • Hungary’s central bank maintained its benchmark rate at 0.9%
    • The country sharpened its warning that it’s ready to use all tools possible to rein in the European Union’s highest inflation, saying it would decide how much action is needed in March
  • Ashmore Group Plc, a $98 billion money manager, has been piling into Lebanon notes due March 9 just as many of its rivals warn a default is all but certain
    • Lebanon has a lot more than just maturing Eurobonds to worry about. In addition to $31 billion of those, the Middle Eastern nation’s central bank has $52.5 billion of obligations in the form of foreign-currency deposits and certificates of deposit, according to Fitch
    • Lebanon’s government intends to ask for a seven-day grace period on its $1.2 billion Eurobond maturing on March 9 to give its financial advisers more time to draft a restructuring plan, Reuters reported, citing a government official that it didn’t name
  • The number of coronavirus cases continues to climb in the Middle East, prompting airlines in countries including Turkey and the United Arab Emirates to place restrictions on flights to Iran, the epicenter of the outbreak in the region

Latin America:

  • Brazil’s central bank stepped in to prop up the real as it tumbled to a record low, selling foreign-exchange swaps
    • President Jair Bolsonaro said he regrets the recent weakness in the real and called for patience, saying he’ll leave currency policy in the hands of the central bank
    • Bolsonaro endorsed protests against congress set for March 15
    • The central government reported a 44.1 billion reais ($10 billion) surplus in January versus the 40.4 billion forecast
    • Bank lending fell 0.4% in January from the previous month
    • The unemployment rate in the three months through January rose for the first time since early 2019, to 11.2%
  • La Rioja province became the latest Argentine borrower to miss a debt payment and said it will seek to begin talks with creditors to renegotiate its $300 million of overseas bonds
    • Country is planning to raise export levies on soybeans to 33% from 30% as it seeks to bridge its fiscal deficit, according to people familiar with the matter, who asked not to be identified because the information isn’t public
    • Government is looking to hire the firm Morrow Sodali Global LLC as an information agent, advising and communicating with bondholders during restructuring talks
    • Nation said it opened proposals to hire financial advisers and bookrunners on Feb. 20
    • A technical team from the International Monetary Fund will travel to Buenos Aires Monday for meetings with government officials to continue talks, according to a spokesman
  • Mexico’s central bank slashed its growth forecast for this year and said it will take longer than expected for inflation to slow to target, suggesting policy makers have limited room to lower borrowing costs to stimulate the economy

    • The nation’s economy contracted in the fourth quarter and ended 2019 with its worst performance in a decade
    • Central bank deputy governor Gerardo Esquivel said he sees a possibility of recovery in the economy
    • Unemployment rate rose to 3.79% in January from 2.91% previously, surpassing the median estimate
    • Pemex reported its biggest quarterly loss in two years as production growth stalled
  • The Trump administration is ready to unleash the full impact of sanctions on Chevron Corp.’s operations in Venezuela as the U.S. seeks to further squeeze the Maduro regime
  • Ecuador’s Finance Ministry said it’s not considering re-profiling global bonds
  • Colombia’s industrial and retail confidence rose in January
  • Chile’s finance minister signed the decree that set new targets for the government’s structural deficit after social unrest derailed the previous plans
    • Unemployment rate rose more than expected in January, reaching the highest since September 2011, even as industrial production expanded for a second consecutive month
Upcoming Data and Economic Releases
  • For Asia, click here
  • For Eastern Europe, click here
  • For Latin America, click here

--With assistance from Philip Sanders, Netty Ismail and Paul Wallace.

To contact Bloomberg News staff for this story: Yumi Teso in Bangkok at yteso1@bloomberg.net;Aline Oyamada in Sao Paulo at aoyamada3@bloomberg.net;Colleen Goko in Johannesburg at cgoko2@bloomberg.net

To contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, Karl Lester M. Yap

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With assistance from Bloomberg