Oil Stokes Risks in ‘Close-Your-Eyes-and-Sell’ Emerging Markets

(Bloomberg) -- Tumbling oil prices are adding a fresh ingredient to the coronavirus-fueled nervousness sweeping emerging markets, setting the stage for another week of turmoil.

Brent slumped as much as 31% on Monday, Asian stocks nosedived and currencies from the Mexican peso to South African rand weakened after the world’s biggest crude producers failed to agree on production cuts last week, kicking off a price war. The declines extend a sell-off that overtook developing-nation markets at the end of last week as policy makers struggled to stave off the economic fallout from the spreading virus.

“Close your eyes and sell emerging-market currencies -- this is not a time to get too fancy and look for cost-effective crisis trades,” Jason Daw, head of emerging-market strategy at Societe Generale SA in Singapore, wrote in a client note. “Oil-market developments over the weekend can compound already fragile market sentiment.”

While the prospect of coordinated easing by the world’s biggest central banks underpinned a rebound in emerging-market stocks earlier this month, doubts remain about the long-term effect on demand. The European Central Bank is due to meet Thursday in the wake of the Federal Reserve’s emergency rate cut last week. The Fed’s 50 basis-point reduction drove the Bloomberg Dollar Spot Index to its weakest level since January and government bond yields to unprecedented lows.

“Monetary easing should continue, and cushion the blow from extended uncertainty and collapsing global trade,” a Deutsche Bank AG team including Drausio Giacomelli, head of emerging-markets strategy in New York, wrote in a report Friday. “We see both yields and currencies near bottom, but we doubt emerging-market growth-sensitive assets will rebound before convincing signs indicating the official containment of these shocks.”

Emerging-market investors, when not fretting over coronavirus headlines, will be watching events related to Lebanese debt negotiations after the government said over the weekend it won’t pay a $1.2 billion Eurobond maturing Monday. Other key events this week include Chinese inflation data, and monetary policy decisions in Peru, Ukraine and Serbia.

Asia Economic Data

• Chinese data this week, including an inflation report on Tuesday, will offer further clues on the impact of the virus. Chinese numbers published Saturday showed exports fell more than expected in the first two months of this year. PPI figures are also due Tuesday
• Trade data was due from Taiwan on Monday; the Philippines will post its own on Tuesday
• India is due to release inflation data on Thursday, with Bloomberg Economics predicting price gains cooled to below 7%. The Reserve Bank of India will probably hold its key rate in April, although there is a small probability of a rate cut, it said

East Europe Inflation

• Hungarian Prime Minister Viktor Orban, central bank Governor Gyorgy Matolcsy and Finance Minister Mihaly Varga will speak on Tuesday
• Hungary, the Czech Republic and Egypt will publish inflation data on Tuesday. Poland’s statistics follow on Friday
• South Africa, which slipped into recession in 2019, will release business confidence and manufacturing-production numbers. The rand is the worst-performing emerging-market currency this year
• Ukraine decides monetary policy Thursday, with almost all economists expecting a cut. Serbia has a rate decision the same day

Brazilian Rate Clues

• ​​​Brazilian inflation data on Wednesday will probably provide clues to whether the central bank will cut interest rates at its next meeting. Industrial production data for January could further stoke concern about easing if the results on Tuesday come in below expectations
• Mexico’s February inflation data accelerated to 3.7% year-over-year. Industrial production numbers will be published on Friday
• Peru’s central bank will probably cut interest rates by 25 basis points on Thursday after disappointing economic growth in the fourth quarter, according to Bloomberg Economics
• Colombia’s January retail sales data will be released on Friday. Bank of America said buying the nation’s credit-default swaps was a “cheap hedge” against the virus-fueled turmoil in global markets
• Argentina will continue efforts to reach an agreement with bondholders by the end of March to restructure its debt. The country also reopened the sale of floating-rate Lebad notes and was selling new peso-denominated securities at a discount on Monday

--With assistance from Sydney Maki, Karl Lester M. Yap and Alec D.B. McCabe.

To contact the reporters on this story: Justin Carrigan in London at jcarrigan@bloomberg.net;Simon Flint in Singapore at sflint18@bloomberg.net

To contact the editors responsible for this story: Justin Carrigan at jcarrigan@bloomberg.net, Karl Lester M. Yap, Nicholas Reynolds

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