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No Reprieve for Emerging Markets With Rout in Virus-Hit China

Emerging-market stocks and currencies are headed for more tumult as investors weigh economic shocks from the coronavirus outbreak.

No Reprieve for Emerging Markets With Rout in Virus-Hit China
List of emerging market currencies displayed on a screen. (Photographer: Sanjit Das/Bloomberg)

(Bloomberg) -- 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.

Whither the Yuan?

  • China set its daily yuan reference rate stronger than the key 7-per-dollar level
    • The 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 points
  • Among 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

Rate Cuts

  • 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 Thursday
    • Bloomberg 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

Economic Data and Events

  • Argentine Economy Minister Martin Guzman is set to meet International Monetary Fund Managing Director Kristalina Georgieva on Wednesday to discuss the South American nation’s $56 billion credit line. Bondholders have until Monday to accept a proposal to delay a key bond payment from Buenos Aires province
  • Asian manufacturing gauges stumbled in January, data showed on Monday, suggesting the U.S.-China trade agreement failed to spur sentiment for an industry now bracing for supply-chain disruptions and a blow to demand from the spread of the coronavirus
  • January trade figures from China are due on Friday. Taiwan will also report its trade statistics for the same month on the same day
  • January inflation figures will also be unveiled: Indonesia kicked off on Monday with the consumer-price index rising slower than estimated at 2.68% from a year earlier. South Korea will announce on Tuesday, the Philippines on Wednesday, while Taiwan and Thailand will report on Thursday
  • Indonesia will release fourth-quarter GDP figures on Wednesday. A Bloomberg survey of economists predicts Southeast Asia’s largest economy grew 5.04% from a year earlier, compared with 5.02% in the previous quarter
  • In Turkey, inflation accelerated 12.2% in January, exceeding most forecasts and possibly forcing a pause in an easing cycle that the central bank has kept alive despite a buildup in price pressures
    • Real interest rates are in negative territory following a cumulative 1,275-point reduction over the central bank’s last five meetings
  • Sentiment in South Africa’s manufacturing industry fell to the lowest level in four months in January as weak demand weighed on factory output
    • Absa Group Ltd.’s Purchasing Managers’ Index, compiled by the Bureau for Economic Research, dropped to 45.2 from 47.1 in December; the median estimate of six economists in a Bloomberg survey was 47.3
    • Other data, including the Business Confidence Index on Thursday and foreign-exchange reserves on Friday, will show whether Africa’s most-industrialized economy is recovering from a third-quarter contraction
  • Mexican inflation data for January is also expected to be released on Friday. The peso is the only Latin American currency to advance so far in 2020

--With assistance from Karl Lester M. Yap, Alec D.B. McCabe and Tomoko Yamazaki.

To contact the reporters on this story: Netty Ismail in Dubai at nismail3@bloomberg.net;Lilian Karunungan in Singapore at lkarunungan@bloomberg.net;Robert Brand in Cape Town at rbrand9@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, Paul Wallace, James Amott

©2020 Bloomberg L.P.