Policy-Watch and Prayers: Emerging Markets Gird for More Turmoil

With the world in the grip of one of thebiggest risk sell-offs since the 2008 global financial crisis, more coronavirus-fueled declines in emerging markets may only be tempered by the prospect of coordinated central bank action or even large fiscal stimulus.

More than $1.1 trillion was wiped off the value of developing-nation stocks and bonds last week as the economic impact of the coronavirus worsened. Currencies and equities rounded off February with back-to-back monthly declines, while spreads widened by the most since August.

“The week will start horrible, but may improve on central-bank pivots, with a coordinated G-20 fiscal pump not out of the question,” said Stephen Innes, the Bangkok-based chief market strategist at Axicorp. “Given the tightening of financial conditions due to the stock-market meltdown, the U.S. Federal Reserve will deliver to weaken the dollar. If none of this works, just pray.”

Developing assets tumbled in the five days through Friday as investors piled into havens, with U.S. Treasury yields dropping to all-time lows and Brent oil pricescrashing below $50 a barrel. Little was spared. MSCI Inc.’s gauge of emerging equities dropped 7.3%, the most since 2011. The Russian ruble, South African rand and Colombian peso all weakened more than 4% against the dollar.

As the virus continued its spread last week, with Latin America and Africa confirming their first cases, expectations grew that the World Health Organization would declare apandemic. More airlines cut flights to affected regions, while governments increased travel restrictions, shut schools and banned sporting and entertainment events.

China’s manufacturing sector slumped themost on record in February, a report showed on Saturday. The economy was probably only operating at 60-70% of normal capacity at the end of last month, according to Bloomberg Economics estimates. Goldman Sachs Group Inc. said the world economy willprobably contract on a quarterly basis in the first two quarters of this year.

As if the virus weren’t enough, traders head into the first week of March amid a deepeningmilitary standoff between Turkey and Russia, politicalturmoil in Malaysia, anti-government protests in Thailand and an upsurge in religious violence in India.Lebanon, meanwhile, may make a decision on whether to default on $1.2 billion of Eurobonds maturing on March 9.

Malaysian Rates

  • Malaysia’s central bank will decide on Tuesday whether to go ahead with a second consecutive interest-rate cut amid the political crisis. The turmoil has cast a pall over a slowing economy and hampers the government’s ability to curb the impact of the coronavirus outbreak
    • Economists are divided on Bank Negara’s next move, with seven out of 14 expecting it to stay on hold at 2.75% and the remainder predicting a cut of 25 basis points, according to a Bloomberg survey
    • Malaysia’s Mahathir Mohamad willseek an urgent parliament sitting to show that he has the majority support among lawmakers to be the country’s prime minister instead of Muhyiddin Yassin, who was sworn in Sunday

    Turkish Inflation

    • Data on Tuesday is expected to show Turkish inflation climbed to 12.7%, pushing real interest rates further into negative territory
    • In South Africa, the statistics office on Tuesday will reveal whether the nation averted a second recession in as many years in the fourth quarter, and will probably also confirm the weakest annual growth since the global financial crisis
    • On Wednesday, Poland’s central bank is expected to keep interest rates unchanged at 1.5%, even as money-market traders increase their bets oneasing in the next 12 months

    Fed Alert

    • Fed Chairman Jerome Powell is standing ready to cut interest rates after saying Friday that the U.S. central bank will “act as appropriate” and that the virus poses “evolving risks” to the U.S. economy
    • About a dozen U.S. policy makers will make public remarks, including six on Friday at a conference in New York to commemorate former Fed economist Marvin Goodfriend. Investors will also watch the release of the February employment report on Friday to gauge the labor market’s strength before the virus spread more widely. The Bloomberg survey points to non-farm payrolls gaining 175,000 versus 225,000 the previous month

    — With assistance by Netty Idayu Ismail

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