Emerging Markets on Edge as Viral Outbreak Spreads From China

(Bloomberg) -- The rapid spread of a deadly virus from China is top of emerging-market investors’ minds as they ponder its impact on the global economy.

Concern the outbreak will develop into something akin to the SARS pandemic of 2003 halted a seven-week rally in emerging markets in the five days through Friday, and continued to weigh on currencies, stocks and bonds on Monday. With China’s markets closed for the Lunar New Year holidays, the nation’s assets abroad came under pressure.

The offshore yuan slid to the weakest level this year and neared 7 per dollar, while a China-focused exchange-traded fund in Europe plunged about 8%, poised for its biggest decline since May. The death toll in China from the virus climbed to at least 80 and confirmed cases in the Asian nation jumped to more than 2,700.

“The Wuhan coronavirus outbreak has the potential to whipsaw Chinese equities and, indeed, all global risk assets,” said Seema Shah, chief strategist at Principal Global Investors in London. “With valuations elevated, asset classes are already vulnerable to shifts in sentiment, and memories of the meaningful economic impact of SARS have the potential to play havoc with market confidence.”

As traders weigh the impact of the virus on Chinese businesses and consumption, the non-manufacturing reading of the nation’s purchasing managers’ index may offer early signs of its effects on the service sector. The phase-one trade deal with the U.S. this month, combined with recovering global demand, had improved the outlook for Chinese factories and exporters in 2020.

China extended the Lunar New Year break until next Monday to help stem the spread of the virus. With holidays across Asia, trading flows may be below average.

Some bulls aren’t wavering. The onshore yuan is unlikely to weaken beyond 7 per dollar when trading resumes because the outbreak will is likely to be contained over the next couple of weeks, said Mansoor Mohi-uddin, a Singapore-based senior macro strategist at NatWest Markets. The potential for further tariff reductions before the U.S. elections in November may even drive the Chinese currency toward 6.65, he said.

Morgan Stanley strategists, including James Lord, said they aren’t ready to call for an end to the emerging-market rally, citing improving global activity, supportive central-bank policy, strong inflows and valuations that don’t look too rich yet.

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Contagion fears aside, emerging-market investors will be watching interest-rate decisions in the U.S., Kenya, Angola, Hungary, Pakistan, Chile, Sri Lanka, Ukraine and Ghana this week.

Ukraine Seen Easing

• The Federal Reserve is widely expected to hold rates steady at the end of its two-day meeting on Wednesday
  • Read: Fed Seen Holding Rates Steady, Ending Bill Purchases by June
  • U.S. growth probably maintained momentum in the fourth quarter at a 2.1% annualized pace, a report Thursday is forecast to show
• Kenya’s central bank unexpectedly cut its benchmark interest rate for a second consecutive meeting, saying price expectations are anchored and the economy is operating below its potential
  • The monetary policy committee reduced the rate to 8.25% from 8.5%
• Ukraine’s central bank will probably slash its benchmark interest rate to 11.5% from 13.5% on Thursday
  • Inflation has plummeted to the lowest in almost six years after the hryvnia outshone all other currencies against the dollar in 2019
• Ghana will also decide on Friday on its benchmark rate, which has been at 16% for a year; inflation came in below the year-end target set by the government
• The central bank in Chile will probably leave its key interest rate unchanged on Wednesday, waiting for more information on unemployment, retail sales and copper production that will be released on Friday
• Policy makers in Hungary, Pakistan and Colombia are set to keep their borrowing costs unchanged
• Angola is scheduled to decide on interest rates Monday, and Sri Lanka on Thursday

Economic Data and Events

• South Korea unveils its industrial production data for December on Friday and full-month trade figures for January on Feb. 1. Early trade figures for January showed overall exports dropped 0.2% during the first 20 days from a year earlier, the smallest decline in a year
• Thailand is due to report on Friday its current-account balance for December
• Investors will seek guidance on Turkey’s monetary policy when the central bank unveils its first inflation report of the year on Thursday
  • It’s unlikely to make major revisions to the 8.2% inflation forecast for end-2020, according to Bloomberg Economics
• Argentina’s Lower House is expected to discuss a debt sustainability bill on Thursday that may help the government renegotiate its debt burden with bondholders. At the provincial level, the new deadline for creditors to accept Buenos Aires’ proposal to extend debt payments falls on Friday
• Investors will watch for Brazil’s December current-account balance on Monday and inflation numbers on Thursday for clues about the pace of economic recovery in Latin America’s largest economy. The real is the worst-performing currency in the region this year
• In Mexico, preliminary fourth-quarter GDP figures to be published on Thursday will probably show the economy stagnating. Still, the peso is widely expected to remain a top carry trade among major currencies

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