No reprieve for emerging markets amid China stock rout

Fresh from their worst month since August, emerging-market stocks and currencies are headed for more tumult as investors weigh the economic shocks from the coronavirus outbreak.

Chin’s yuan and stocks plunged, while bonds gained as onshore financial markets reopened on Monday for the first time since January 23 after the extended Lunar New Year holidays. Chinese regulators unveiled a slew of measures to ensure stability of its $45 trillion financial system as the nation stepped up the fight against the spreading virus.

A sense of foreboding is spreading through emerging markets on concern that the fast-spreading virus, which has killed more than 300 people and sickened thousands, could crimp global growth. MSCI Inc.’s index of developing-nation equities sank below its 50- and 100-day moving averages last week, heralding further declines from a 1 1/2-year peak reached in mid-January. The CBOE Emerging Markets ETF Volatility Index rose in January by the most since October 2018. JPMorgan Chase & Co’s gauge of expected price swings in developing-nation currencies climbed to the highest since December 10.

“The coronavirus is an unquantifiable risk and precedents like Sars may not be that helpful because of China’s greater economic size, consumption share, and global integration compared to 2003,” said Hasnain Malik, the Dubai-based head of equity strategy at Tellimer. “Investors, particularly after a year of good returns, are naturally going to be very sensitive to worsening data on infection and deaths, regardless of stimulus measures for the economy.”

A slew of central-bank meetings in developing economies this week will likely offer clues on the potential impact of the virus on growth and monetary policy. Russia, Brazil and the Philippines will probably cut their benchmark interest rates.

Whither the yuan?

• China set its daily yuan reference rate stronger than the key 7-per-dollar level
  • The People’s Bank of China supplied 1.2 trillion yuan ($172 billion) to money markets on Monday, which came up to 150 billion yuan on a net basis, according to calculations by Bloomberg
  • China also reduced borrowing costs on the funds by 10 basis points
• Among data out on Monday, profits at Chinese industrial enterprises dropped in December, before the Lunar New Year holiday and a deadly pneumonia outbreak caused an extended shutdown of industry
  • Industrial profits fell 6.3% in December 2019, the National Bureau of Statistics said. The profits had gained in November after falling in October

Rate cuts

• Philippine policy makers will probably lower their benchmark interest rate to 3.75% from 4% on Thursday, economists predict. Bangko Sentral ng Pilipinas Governor Benjamin Diokno said on Jan. 30 a 50-basis-point cut remains on the table this year following a reduction of 75 points in 2019
• On Friday, the Bank of Russia will make its first rate decision since President Vladimir Putin revamped Russia’s government last month. The majority of economists surveyed by Bloomberg expect a 25 basis-point cut to 6%
• Brazil’s central bank is expected to lower rates by 25 basis points on Wednesday. Investors will also watch industrial production data on Tuesday and inflation figures on Friday for signs about the economy’s health. The real dropped to a record low on Friday and is the third worst-performing currency in emerging markets in 2020
• Bank of Thailand is set to maintain its key rate at a record-low 1.25% on Wednesday. Capital Economics predicts the central bank will ease as Thailand is among those most vulnerable to a sharp drop in Chinese tourist arrivals due to the virus outbreak
• The Reserve Bank of India will likely hold its benchmark at 5.15% on Thursday
  • Bloomberg Economics expects the central bank to resume rate cuts in April as food inflation cools; India’s domestic bonds have advanced a second month in January, according to a Bloomberg Barclays index
  • Indian Prime Minister Narendra Modi’s second budget in seven months disappointed investors who were hoping for big-bang stimulus to revive growth in Asia’s third-largest economy. The plan proposed tax cuts for individuals and wider deficit targets, but failed to provide specific steps to fix a struggling financial sector, improve infrastructure and create jobs
• Czech rate setters will probably keep interest rates unchanged at a meeting on Thursday, even if the debate around the need for further monetary policy tightening has intensified after an upside surprise in inflation data
• Poland’s central bank concludes a two-day rate meeting on Wednesday, with all of the economists in a Bloomberg survey expecting it to stay put at 1.5%
• On Monday, Colombia’s central bank will release minutes from its January meeting, which may offer guidance on the bank’s less dovish outlook. The nation will also post inflation data for the same month on Wednesday. Its peso fell for four straight weeks in January

Economic data and events

• Argentine Economy Minister Martin Guzman is set to meet International Monetary Fund Managing Director Kristalina Georgieva on Wednesday to discuss the South American nation’s $56 billion credit line. Bondholders have until Monday to accept a proposal to delay a key bond payment from Buenos Aires province
• January trade figures from China are due on Friday. Taiwan will also report its trade statistics for the same month on the same day
• Other Asian economies from Taiwan to India are also due to report PMI manufacturing data on Monday
• January inflation figures will also be unveiled: Indonesia kicks off on Monday, South Korea on Tuesday, the Philippines on Wednesday, while Taiwan and Thailand will report on Thursday
• Indonesia will release fourth-quarter GDP figures on Wednesday. A Bloomberg survey of economists predicts Southeast Asia’s largest economy grew 5.04% from a year earlier, compared with 5.02% in the previous quarter
• In Turkey, inflation data on Monday will probably show a reading of 11.9%, leaving real interest rates in negative territory following a cumulative 1,275-point reduction over the central bank’s last five meetings. The institution held its year-end inflation projection at 8.2% on Thursday
• In South Africa, a slew of data, including the manufacturing PMI on Monday, the Business Confidence Index on Thursday, and foreign-exchange reserves on Friday will show whether Africa’s most-industrialised economy is recovering from third-quarter contraction
• Mexican inflation data for January is also expected to be released on Friday. The peso is the only Latin American currency to advance so far in 2020.