Virus Peril May Make April Cruelest Month for Emerging Markets
A trader signals a contract price during trading in Taiwanese stock index futures. (Photographer: Jonathan Drake/Bloomberg News)

Virus Peril May Make April Cruelest Month for Emerging Markets

(Bloomberg) -- Emerging markets are about to find out just how much rougher April will be for them than developed economies.

The signals are in the price swings anticipated by traders.

The gap between a JPMorgan Chase & Co. gauge of expected swings in developing-nation currencies and a similar Group-of-Seven measure is the widest since June, after evaporating in March. Likewise, the spread between the Cboe Emerging Markets Volatility Index and the VIX gauge for U.S. stocks grew to 1.4 percentage points as of Friday’s close.

While the Mexican peso edged up after a record intraday low in early Monday trading, some were skeptical on an economic plan unveiled on Sunday by President Andres Manuel Lopez Obrador. The plan to counter the coronavirus fallout was “underwhelming,” said Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc. Mexican authorities “seem to be underestimating the economic impact of the viral pandemic and the need for a deeper re-orientation of fiscal policy,” Ramos said.

EM Weekly Podcast: Mexico Stimulus; Policy Meetings; Oil Moves

Oil’s newfound vigor also hangs in the balance as a row between Saudi Arabia and Russia threatens to scupper a possible deal among global producers to curb supply. The lack of such an accord would hit the world’s two largest crude exporters and other energy-dependent economies including Mexico, Colombia, Nigeria and Angola. Brent crude fell 2.6% to $33.23 a barrel at 12:00 p.m. in New York.

Developing-nation central banks, meanwhile, have already used up much of the monetary arsenal needed to support their currencies and economies in the face of the virus. With interest rates in emerging economies at multi-year lows -- and near zero in the case of nations such as South Korea and Israel -- the carry returns that attract foreign funds are diminishing.

“Uncertainty around both the supply-side and demand-side for oil should continue to effect volatility,” said Marshall Stocker, a money manager at Eaton Vance Corp. in Boston, which oversees about $520 billion of assets. “Policy adventurism can be expected at the country level as there is no history from which to identify an orthodox policy response. Therefore there will be health, fiscal, and monetary-policy mistakes and achievements made this coming and in future weeks.”

Virus Peril May Make April Cruelest Month for Emerging Markets

Government spending pledges in some emerging markets dwarf what’s ever come before. Even so, they pale in comparison with the trillions of dollars promised in Europe and America. That discrepancy threatens to set the asset class back and is partly to blame for the record $83 billion sucked out of developing-nation stocks and bonds in March alone.

South Korea, Israel, Poland Decide

  • South Korea will decide on its benchmark interest rate on Thursday, with Bloomberg Economics forecasting it will remain on hold following an emergency cut of 50 basis points in March
    • “The economy is set to contract and inflation is moving further away from the central bank’s 2% target,” Bloomberg Economics said in a note. “Even so, the Bank of Korea may conserve its policy ammunition at this meeting as it assesses the impact of emergency monetary and fiscal stimulus”
  • Israel’s central bank cut rates to 0.1% from 0.25% on Monday. It was the authority’s firs rate reduction since 2015 and announced additional measures that include low-interest loans to banks and repurchase transactions with corporate bonds accepted as collateral.
  • Poland will likely keep benchmark borrowing costs unchanged on Wednesday. Serbia will decide the following day
  • Czech lawmakers are expected to approve a new law on the central bank, which will give it an option to start asset purchases

Crude Wild Card

Inflation, Foreign Reserves

  • IHS Markit’s March services PMI index for India fell to 49.3 from 57.5 in February, data released on Monday showed. The composite PMI index dropped to 50.6 from 57.6
  • The Philippines and Thailand will both publish inflation data Tuesday, with the former’s reading forecast to slow for a second month. Taiwan will report its inflation figures on Wednesday, while China’s headline rate is also expected to slow in Friday’s data
  • Inflation in Russia probably accelerated to 2.7% in March from 2.3% as the ruble declined along with oil prices. But price pressure will abate as the pandemic weighs on demand, creating room for the central bank to look through temporary ruble weakness and resume easing once financial markets stabilize, according to Bloomberg Economics
  • Indonesia, Taiwan, the Philippines, China and Malaysia are all due to report March foreign reserves on Tuesday. These will give an indication about the extent of local currency defenses across the region -- after Korea’s reserves fell by the most since 2008 in March.
    • Still, Malaysia may be reluctant to show a number below $100 billion, making it likely that much of Bank Negara’s intervention to support the ringgit was undertaken through FX forwards
    • The same will be true of China’s more distant but psychologically important $3 trillion figure. Its central bank is also likely to use other means to defend the currency
  • Brazil’s February retail sales figures, set for release on Tuesday, are expected to show growth from a year prior. An economic activity reading for the same month will also probably be positive, though both figures reflect a period largely before the coronavirus hit. March IPCA numbers should flag low inflation, according to Bloomberg Economics
  • Mexico’s inflation decelerated in March, data on Tuesday are expected to show. Traders will also eye industrial production numbers on Wednesday for clues to the economic toll of the virus

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