After a $1 Trillion Wipeout, Emerging Markets Bank on Stimulus

(Bloomberg) -- With the world reeling from one of the biggest 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 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 bond spreads widened by the most since August.

On Monday, emerging stocks and currencies reversed some of the losses after the Bank of Japan and Italy’s government announced stimulus measures.

Markets “may improve on central-bank pivots, with a coordinated G-20 fiscal pump not out of the question,” Stephen Innes, the Bangkok-based chief market strategist at Axicorp, said on Sunday. “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 oil prices crashed and investors piled into havens, with U.S. Treasury yields dropping to all-time lows. 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.

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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 a pandemic. More airlines cut flights to affected regions, while governments increased travel restrictions, shut schools and banned sporting and entertainment events.

Read: Trump to Meet Pharma Executives; Toll Passes 3,000: Virus Update

China’s manufacturing sector slumped the most 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 (NYSE:GS). said the world economy will probably 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 deepening military standoff between Turkey and Russia in Syria, political turmoil 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.

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Malaysian Rates

• Malaysia’s central bank will decide on Tuesday whether to go ahead with a second consecutive interest-rate cut. The political crisis sparked by Mahathir Mohamad’s surprise resignation as prime minister has cast a pall over a slowing economy and hampers the government’s ability to curb the impact of the coronavirus outbreak
  • Fifteen out of 24 economists in a Bloomberg survey expect a cut of 25 basis points, while the remainder predict it to stay on hold at 2.75%2
  • READ: Malaysia Shock Power Shift Has Investors ‘Shakin’ All Over’
  • Why Malaysia Politics Are Messy and What Is at Stake: QuickTake
• On Wednesday, Poland’s central bank is expected to keep interest rates unchanged at 1.5%, even as money-market traders increase their bets on easing in the next 12 months

• Data on Monday showed Asia’s factories took a tumble in February under the weight of the virus, with a severe plunge in activity in China driving down output across the region
  • China’s Caixin Media and IHS Markit purchasing managers’ index dropped to 40.3, its lowest reading since the series began in 2004, according to figures released Monday
• On Monday, Mexico will release economic activity and Markit PMI manufacturing figures that will give investors a better picture of the flagging economy. Gross domestic product contracted by 0.1% in 2019
• Chile is likely to say on Monday that economic activity rose 1.2% year-on-year in January from 1.1% the prior month, a welcome development after a slowdown due to widespread popular protests
• 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
• Brazil will probably say on Wednesday that its GDP grew by 1.6% in the fourth quarter, compared with 1.2% in the third. The nation releases PMI data the same day, while inflation figures are due on Monday
• Argentina on Thursday releases a slew of production figures including construction activity and industrial production