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Wounded Emerging Markets Draw Small Comfort From Big Stimulus

Emerging-market investors are starting the new week doubting that Friday’s rally, coupled with the latest action from the Federal Reserve, will mark a turning point in what is now the fastest collapse in risk assets in more than a generation.
Bloomberg
By Bloomberg
16 Mar
Chinese lunar New Year shopping in Beijing The rebounding Chinese economy coupled with indications that the US Federal Reserve will not raise interest rates for the rest of 2019 is welcome relief for emerging economies. (Photo: EPA-EFE/WU HONG)

While governments increase efforts to slow the spread of the coronavirus, stimulus measures could be too late to prevent a global recession, with businesses suffering from both supply and demand shocks. The MSCI Emerging Markets Index of equities fell more than 1% on Monday in Asia, while a measure of currencies lost 0.1%, even after the Fed cut its key interest rate by a full percentage point to near zero in another unscheduled move on Sunday.“Global markets are facing their gravest challenge since the Great Recession,” Andrew Sheets, Morgan Stanley’s London-based chief cross-asset strategist, said in a note on Sunday. “Low rates don’t solve a shortage of semiconductors if a factory needs to shut down. A tax cut won’t show up as spending if consumers don’t have confidence in the broader public health response.”

Read: Central Banks Coordinate to Boost Global Dollar Liquidity (1)

Emerging markets ended last week on a positive note, but it was small consolation. In the five days through Friday, MSCI Inc.’s index of developing-nation stocks crashed 12%, the most since the 2008 global financial crisis. The Mexican and Colombian pesos each depreciated more than 8% against the dollar to record lows, battered by Brent oil’s slide below $35 a barrel. Average sovereign dollar-bond spreads blew out by 122 basis points to levels not reached in more than a decade.

Emerging-market stocks and bonds were routed last week

Asia Rates Bonanza

  • Indonesia, the Philippines and Taiwan are set to decide on interest rates
  • Bangko Sentral ng Pilipinas and Bank Indonesia are expected to add to the global wave of easing, with Bloomberg Economics forecasting they will each deliver a 25 basis-point rate reduction
  • The collapse in oil prices will ease pressure on Indonesia’s current-account deficit and Philippine inflation, giving authorities room to lower rates

Economic Data

  • Trade data are due from Indonesia on Monday and Taiwan on Friday
  • China’s industrial output declined 13.5% in January to February from a year ago while retail sales fell 20.5%, it reported on Monday. The data was worse than economists had expected
    • The People’s Bank of China added 100 billion yuan ($14 billion) into the banking system via the one-year medium-term lending facility, keeping the rate unchanged at 3.15%
    • The move follows the PBOC’s widely-expected announcement late Friday that it will trim the amount of cash some lenders must hold in reserve
    • The cut, which was also effective from Monday, will free up about 550 billion yuan of liquidity into the financial system.
  • The Philippines will report remittances data on Monday. The funds are a key support for the currency, which is starting to lose its resilience to the global sell-offs, as stocks sink into bear-market territory
  • South Korea is due to release producer-price inflation data on Friday

Russia, Turkey, S. Africa

  • Turkey and South Africa will make interest-rate decisions on Thursday. Turkey’s central bank is expected to cut by 50 basis points to 10.25%, which would extend its easing since July to almost 1,400 basis points, a Bloomberg survey of economists show
  • The South African Reserve Bank is expected to reduce its key rate to 6% from 6.25% by most economists surveyed by Bloomberg, though Goldman Sachs Group Inc. says a cut of 50 basis points is possible
    • The country releases its inflation numbers for February on Wednesday
  • Russia’s monetary authorities decide on interest rates on Friday, with almost all analysts surveyed by Bloomberg forecasting that they will hold at 6%
  • Nigeria, Africa’s biggest oil producer, publishes February inflation data on Monday, with economists expecting the yearly rate to have climbed to 12.3%, from 12.1% in January

Brazil Rates

  • Brazil’s central bank may cut its key interest rate when it meets on Wednesday, although any additional easing was put into question by the market collapse. Swap rates spiked a day after Congress overturned a presidential veto on a welfare benefit, raising concern about the outlook for Jair Bolsonaro’s reform agenda
  • Chile’s fourth-quarter GDP data will probably flag a contraction linked to protests that took place last year, according to Bloomberg Economics
  • Colombia will publish economic activity for January on Friday, though a positive reading may do little to ease concern about lower oil prices and record weakness in the peso. The currency is the worst performer in emerging markets this year
  • In Argentina, investors will be watching for February budget data as the government continues to work toward the restructuring of about $69 billion of foreign bonds

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