Coronavirus crisis: Emerging markets bank on stimulus after $1trn wipeout

By Paul Wallace, Lilian Karunungan and Justin Villamil

(Bloomberg) – With the world reeling from one of the biggest risk sell-offs since the 2008 global financial crisis, more coronavirus-fuelled declines in emerging markets may only be tempered by the prospect of coordinated central bank action or large fiscal stimulus.

More than $1.1trn 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 US 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 US Treasury yields dropping to all-time lows. Little was spared. MSCI'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 Organisation would declare a pandemic. 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 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 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 $1.2bn of Eurobonds maturing on March 9.