Virus peril may make April cruelest month for emerging markets

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 has climbed to the highest since June, after evaporating in March. Likewise, the spread between the Cboe Emerging Markets Volatility Index and the VIX gauge for U.S. stocks has widened to 1.4 percentage points from a discount of as much as 10 basis points last month.

Oil’s newfound vigour 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.

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 coronavirus. 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 in Boston, which oversees about $519 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.”

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 years and is partly to blame for the record $83 billion sucked out of developing nations 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 may cut rates to 0.1% from 0.25% on Monday, after last month committing to purchasing 50 billion shekels ($13.8 billion) of government bonds in the secondary market
• Poland will likely keep benchmark borrowing costs unchanged on Wednesday. Serbia will decide on policy 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
• Mexico’s President Andres Manuel Lopez Obrador on Sunday is slated to release his plan to address the crisis. He said Saturday he’ll do “everything possible” to avoid increasing the country’s public debt to finance a planned economic stimulus

Crude Wild Card

• The Russian ruble and Peruvian sol outperformed other emerging-market peers last week as Brent crude rebounded 37% on hopes that global producers will decide to make historic output cuts. The Opec+ meeting was initially expected for Monday, but got delayed to April 9 as Riyadh and Moscow trade barbs about who’s to blame for the collapse in oil prices. A failure to come to an agreement would likely cause prices to slide again.

Inflation, Foreign Reserves

• India reports March services PMI on Monday after most other Asian countries saw their gauges slide below 50 — the point dividing expansion and contraction — last week
• 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 stabilise, 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 defences 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.