Emerging markets trust China’s virus steps will keep rally going

Emerging markets may take their cue this week from a recovery in commodities and signs China’s efforts to stem the spread of the coronavirus are working.

Gauges of stocks, bonds and currencies in developing economies all rose in the five days through Friday as raw materials had their best week this year. China’s Communist Party officials urged the nation to meet its economic targets for 2020 as Hubei province, the epicentre of the outbreak, reported a slowing rate of new infections.

Despite a rally since late January, emerging markets have underperformed stocks and bonds in developed nations. That trend should soon reverse, according to Pictet Asset Management, which oversees almost $600 billion.

“Valuations in emerging markets, given what’s going on, are more attractive than developed markets,” Luca Paolini, chief strategist at Pictet in London, said in an interview.

MSCI Inc.’s index of emerging equities rose 1.3% last week to pare this year’s loss to 0.8%. Currencies in developing nations strengthened for the first time in four weeks, led by the Mexican peso, South African rand and Russian ruble. Bloomberg’s gauge of commodities rose for the first time since early January.

Saudi G-20

• The U.S. Federal Reserve will publish minutes of its most recent meeting on Wednesday
• Finance ministers from across the world will gather in Riyadh, Saudi Arabia, from Saturday to discuss the global economy and how to limit the fallout from the coronavirus
• Singapore’s government may give some indication of how the virus is affecting Asian economies when it announces its budget on Tuesday
• The People’s Bank of China on Monday cut its one-year rate on medium-term funding to commercial lenders by 10 basis points to 3.15%, the lowest since 2017
  • Monday’s rate cut could herald a reduction in the loan prime rate — the basis for pricing corporate and household loans — on Thursday as authorities seek to keep plenty of cheap money flowing to businesses and consumers struggling to counter the impact of the virus
  • “The focus will be on China for answers critical to the region and beyond — how the battle to contain the coronavirus is progressing, how much of the economy has managed to get going again after extended shutdowns, and how is policy shifting,” according to a report from Bloomberg Economics. “We expect cuts to loan prime rates, and will be on the lookout for other measures aimed at shoring up growth”

Turkey, Indonesia Rates

• Bank Indonesia is expected to cut its benchmark rate on Thursday, having been among the most vocal Asian central banks in saying it will keep policy accommodative to counter the economic impact of the coronavirus
  • Central banks in Malaysia, Thailand and the Philippines have already reduced borrowing costs this year and have signaled they remain open to more easing
  • “Asian central banks are trying to get ahead of the curve of monetary easing to support growth as the rapidly spreading disease dampens the economic outlook,” Prakash Sakpal, an economist at ING Groep NV in Singapore, wrote in a note. “The next one to join the race seems to be Indonesia”
  • Indonesia’s economy is vulnerable to the closure of Chinese factories, which will sap demand for local exports such as palm oil, coal and copper. China is the nation’s top export destination, with shipments last year reaching $28 billion
  • While the rupiah has retreated from a two-year high reached in late January, it is still emerging Asia’s best-performing currency this year, gaining 1.3%
  • Bank Indonesia trimmed its seven-day reverse repo rate by a total 100 basis points last year to 5%
• Analysts expect Turkey’s central bank Governor Murat Uysal to continue his rate-slashing spree on Wednesday, moving a step closer to the single-digit level demanded by President Recep Tayyip Erdogan. Aggressive monetary easing has already brought Turkish interest rates below the level of inflation
  • The lira has weakened 2.6% in the past month