Emerging markets crave big bang stimulus with losses growing

A tug-of-war is developing between investors and policymakers in emerging economies: markets keep dumping assets on concerns of growing risks, prompting authorities to wade in with one-off support measures aimed at stemming the selloff.

China’s yuan extended its losses for a fourth day and erased all of its post-reopening gains even after authorities cut a key interest rate and began considering a stamp-duty reduction for stock trades. But data releases offered further evidence of a failed economic recovery, leaving investors craving for a big bazooka of stimulus rather than half-hearted darts thrown in the dark.

Russia witnessed the same reactions. After rallying as much as 5% before the central bank’s emergency meeting, the ruble erased its gains even though Governor Elvira Nabiullina delivered a robust interest rate hike of 350 basis points. The currency broke below the 100-per-dollar mark on Monday as the country struggles with the economic fallout of Western sanctions.

Investors are impatient for meaningful stimulus measures after two years of monetary tightening, while governments and central banks are finding their capacity to satisfy that desire limited by inflation or currency risks. That’s leading emerging-market stocks to a sixth year of underperformance relative to their US peers and the local-currency index closer to erasing its 2023 gains.

On Tuesday, the stocks benchmark slid for a fourth day and the currency gauge for a third. The cost of hedging against default in a major emerging market rose to a one-month high.

The growing divergence between what investors want and what governments need is evident in countries like Nigeria and Colombia.

In the West African nation, inflation that’s already at an 18-year high may spike further, raising doubts about how far President Bola Tinubu will be able to push his economic reforms. In the Latin American country, data may show a quarter-on-quarter contraction in gross domestic product. Columbia’s central bank, which has been cautious about easing monetary policy, may come under pressure to begin rate cuts.

Meanwhile, the chaos in Argentina will dominate investor sentiment in the West. The country is set to report its latest inflation figures, but a projected drop from 115.6% to 115% isn’t going to do much to brighten the picture. Argentina’s political future is uncertain and Sunday’s primary, which showed gains made by a populist leader, has renewed fears of hyperinflation. The peso may be in for more pain.