Happy-2020 Forecasts Sent Awry as Iran Tension Saps Risk Assets

(Bloomberg) -- Put those 2020 forecasts for emerging markets on hold. The goalposts just moved.

The U.S. assassination of Iran’s General Qassem Soleimani has sent such a shudder through risk assets, it’s managed to eclipse much of the optimism stemming from the impending signing of an initial trade deal between the U.S. and China.

Middle Eastern stock markets nosedived on Sunday, continuing a selloff that began at the end of last week as news emerged that Soleimani had died in a drone attack ordered by President Donald Trump, raising U.S.-Iran tension to a new level. Developing-nation stocks, currencies and bonds remained on the backfoot on Monday.

Listen here to emerging markets weekly podcast.

“The threat of a severe retaliation by Iran will keep investors alert,” ING Groep NV strategists including London-based Chris Turner wrote in a report. “For now, investors remain in wait-and-see mode.”

Read: Forwards Traders Raise Speculative Bets Against Gulf Currencies

Before Friday, expectations of a phase-one U.S.-China trade deal on Jan. 15 had helped drive emerging-market stocks and currencies to the highest levels since June 2018 and average sovereign yield spreads to their narrowest in more than five years relative to U.S. Treasuries. A Bloomberg survey last month found that the majority of 57 strategists and investors polled forecast 2020 would be another year of positive returns for developing-nation assets.

Read: Trade, Trump and Protests: A Guide to the Main EM Risks in 2020Read: Trade, Trump and Protests: A Guide to the Main EM Risks in 2020

Geopolitics aside, emerging-market investors this week will be watching interest-rate decisions in Peru, Poland, Romania and Israel. Taiwan holds a presidential election on Saturday.

Taiwanese Vote

• President Tsai Ing-wen, who is seeking a second term, has refused to endorse Beijing’s bottom line that both sides belong to “one China”, while avoiding overt moves to endorse Taiwan’s independence
• Her main opposition challengers are China-friendly: Han Kuo-yu of the Kuomintang and James Soong of the People First Party making a fourth bid for Taiwan’s presidency
• Read: Odds Lengthen for Taiwan’s China-Friendly Presidential Contender
• The Taiex stock index is near an all-time high as Taiwan became a surprise winner in the trade war between the U.S. and China

Economic Data and Events

• China on Monday released Caixin PMI composite and services measures for December. Both indexes were lower than the previous month, but still showed expansion. China’s due to unveil consumer-price and producer-price inflation data for the same month on Thursday
• Taiwan reports December trade figures on Tuesday, while the Philippines is due to unveil its November trade data later in the week
  • Both countries will release inflation data on Tuesday
• Brazil may say on Friday that consumer price inflation edged higher at the end of the year. Investors in Latin America’s biggest economy, whose currency was among the best performers in emerging markets last month, will also eye November industrial production data on Thursday
• Peru’s central bank will probably keep interest rates steady when it meets on Thursday, though it’s expected to leave the door open for further cuts. The sol -- along with Mexico’s peso -- was one of just two regional currencies tracked by Bloomberg that gained in 2019
• Mexico, meantime, may say on Thursday that inflation fell last month, and release data on Friday that shows industrial production dropped in November
• In Chile, data on Wednesday will probably show inflation accelerated for a third month in December. Still, the increase could be less than its central bank expected, according to Bloomberg Economics.
• A final reading of Russia’s inflation data on Friday will shed light on December’s sharper-than-expected slowdown
  • Goldman Sachs Group Inc. expects inflation to fall toward 2.5% by early this year; it sees the central bank cutting rates three times to 5.5% by mid-2020, before lowering the benchmark further to 5% in 2021
  • The ruble was the best performer in emerging markets last year
• Russian President Vladimir Putin visits Turkey to meet with counterpart Recep Tayyip Erdogan and inaugurate a natural gas pipeline on Wednesday
• In South Africa, a raft of data will provide guidance on the trajectory of the economy before a central-bank policy meeting later this month. Most attention will be on the manufacturing PMI for December, due on Wednesday, followed by a measure of business confidence on Thursday

--With assistance from Karl Lester M. Yap, Samson Ellis, Alec D.B. McCabe and Robert Brand.

To contact the reporters on this story: Netty Ismail in Dubai at nismail3@bloomberg.net;Lilian Karunungan in Singapore at lkarunungan@bloomberg.net;Sydney Maki in New York at smaki8@bloomberg.net

To contact the editors responsible for this story: Alex Nicholson at anicholson6@bloomberg.net, Justin Carrigan, Paul Wallace

©2020 Bloomberg L.P.