Will emerging markets rally continue? Stock market gains now at mercy of guardians of economy

By: |
April 14, 2020 11:19 AM

Whether emerging markets extend last week’s across-the-board gains will probably depend on what the so-called guardians of the global economy do to save them from the worst of the coronavirus.

Traders are bracing for one of the worst first-quarter earnings seasons in living memory.

Whether emerging markets extend last week’s across-the-board gains will probably depend on what the so-called guardians of the global economy do to save them from the worst of the coronavirus. But even if the International Monetary Fund and Group of 20 offer help this week to address what former IMF chief economist Maury Obstfeld described as the greatest global crisis of the postwar period, the risks to the rally are manifold. Traders are bracing for one of the worst first-quarter earnings seasons in living memory as well as data showing a slump in Chinese economic output.

“While we expect a recovery of flows to emerging markets in the second half of 2020, we do not believe that the pickup will be strong enough to bring about a return to 2019 levels,” economists at the Washington-based Institute of International Finance, including Robin Brooks and Elina Ribakova, wrote in a note. “We expect many countries to turn to multilateral support in coming months due to external financing stress and a lack of policy space to support their economies.”

Ethiopia’s Prime Minister Abiy Ahmed, last year’s Nobel Peace Prize winner, said in a Bloomberg Opinion piece that Africa needs emergency fiscal stimulus worth $100 billion, in addition to the IMF’s already planned $50 billion of regular support, to tackle the Covid-19 crisis.

The OPEC+ grouping of major oil producers agreed to almost 10 million barrels a day of supply cuts on Sunday. Brent crude rose on Monday, and the deal reduces the risk of prices extending their decline of about 55% this year.

Emerging-market stocks and local-currency bonds had their best weekly performance in four years in the five days through Friday, while developing-nation currencies had their biggest weekly gain since June. The U.S. Federal Reserve helped by announcing an extra $2.3 trillion of liquidity on Thursday.

Still, the prospect of debt defaults, unsustainable stimulus efforts and unbridled infection rates in the world’s most vulnerable economies has left many investors on the sidelines. Emerging-market equity funds recorded net outflows for an eighth consecutive week in early April, according to EPFR Global.

Another Rate Cut

  • Indonesia’s central bank meets on Tuesday and the consensus is there will be a further 25 basis-point rate reduction to 4.25%. That would be the third cut this year. However, if the rupiah remains under pressure, the decision to loosen policy may be deferred
  • The Reserve Bank of India is ready to implement more steps to insulate the economy from the coronavirus outbreak, minutes of its latest meeting show. The monetary authority reduced the benchmark repurchase rate by 75 basis points to 4.40% last month and announced steps to boost liquidity in a stimulus worth 3.2% of gross domestic product
  • Investors are awaiting minutes on Thursday from Chile’s last central bank meeting. The monetary authority cut borrowing costs twice in March to offset the impact of Covid-19
  • “We should expect more interest-rate cuts and fiscal stimulus but, in many emerging markets, lower rates of financial inclusion and higher reliance on informal labor inhibit their impact,” said Hasnain Malik, the Dubai-based head of strategy at Tellimer

China’s GDP, Trade Data

  • China’s first-quarter gross domestic product data are due on Friday. The Bloomberg consensus is for a 6% year-on-year contraction. Industrial-production data for March are also due and are expected to show a 7% contraction, while retail sales probably fell 10%. Fixed-asset investment is likely to slide 15% from a year earlier, according to economists surveyed by Bloomberg
    • China will release March trade data on Tuesday. It’s expected that both exports and imports will show a double-digit contraction. The following day, Indonesia and India will also release trade numbers
  • Malaysia’s industrial production growth accelerated to 5.8% in February, surpassing economists’ median forecast of 0.9%. The country on Friday announced that it will extend its lockdown period to April 28
  • India’s inflation decelerated to 5.9% in March from 6.6% a month earlier, data on Monday showed. That was in line with expectations
  • The Philippines will release remittance numbers on Wednesday. There’s concern they could contract sharply this year, partly due to the drop in energy prices hitting Middle Eastern economies
  • South Korea’s unemployment data will be released on Friday. The country’s central bank last week announced further measures to channel liquidity to the economy, expanding the range of bonds eligible for its open market operations and flagging outright purchases of government bonds
  • Russia’s industrial production due Wednesday should show signs of stress in March, though the brunt of the impact from the pandemic is likely to hit the sector this month
  • Colombian retail sales for February, to be published on Wednesday, may flag the effects of a lockdown. The peso has fallen more than 15% this year
  • Investors are expecting Mexico’s international reserves data on Tuesday. Formal job creation figures may also provide clues on how the economy is faring. The peso is the third-worst emerging-market currency this year

Debt Discussions

  • Ecuadorian officials must persuade most of the country’s creditors to accept interest-payment delays by Friday, the current deadline
  • Argentina, meantime, is still working to present a renegotiated debt deal to bondholders. The nation will make an offer to its creditors “in the coming days” that will reflect the economic hit from the coronavirus, President Alberto Fernandez said in a newspaper interview
    • Inflation figures for March, released on Wednesday, will provide the first indication of the effects of the country’s lockdown

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Angel Broking’s Rs 600-crore IPO opens next week; check issue price, bid size, details
2Wipro, Mphasis, Mindtree shares hit new 52-week highs; IT stocks rally, Nifty IT index up 1%
3Time to invest in low-debt firms in these sectors; and what to expect from CAMS, Chemcon IPOs | IIFL Interview