2020 forecasts for emerging markets sent awry as US-Iran tensions drain risk assets

The killing of Iranian General Qassem Soleimani has sent a shudder through risk assets, managing to eclipse the optimism over the US-China trade deal.

A buyer monitors market fluctuation (Representational Image) | PTI File photo

Dubai/Singapore/New York: Put those 2020 forecasts for emerging markets on hold. The goalposts have just moved.

The U.S. assassination of Iran’s General Qassem Soleimani has sent such a shudder through risk assets, it’s managed to eclipse much of the optimism stemming from the impending signing of an initial trade deal between the U.S. and China.

Middle Eastern stock markets nosedived Sunday, continuing a selloff that began at the end of last week as news emerged that Soleimani had died in a drone attack in Iraq ordered by President Donald Trump, raising U.S.-Iran tension to a new level. Developing-nation stocks, currencies and bonds dropped by the most since November on Friday, and analysts are expecting Asian markets to remain on the backfoot Monday.

“The threat of a severe retaliation by Iran will keep investors alert and imply further downside in case of a step-up in tension,” ING Groep NV strategists including London-based Chris Turner wrote in a report. “For now, investors remain in wait-and-see mode.”

Before Friday, expectations of a phase-one U.S.-China trade deal on 15 January had helped drive emerging-market stocks and currencies to the highest levels since June 2018 and average sovereign yield spreads to their narrowest in more than five years relative to U.S. Treasuries. A Bloomberg survey last month found that the majority of 57 strategists and investors polled forecast 2020 would be another year of positive returns for developing-nation assets.

Geopolitics aside, emerging-market investors this week will be watching for interest-rate decisions in Peru, Poland, Romania and Israel. Elsewhere, Taiwan holds its presidential election on Saturday.

Taiwanese Vote

• President Tsai Ing-wen, who is seeking a second term, has refused to endorse Beijing’s bottom line that both sides belong to “one China”, while avoiding overt moves to endorse Taiwan’s independence
• Her main opposition challengers are China-friendly: Han Kuo-yu of the Kuomintang and James Soong of the People First Party making a fourth bid for Taiwan’s presidency
• The Taiex stock index is near an all-time high as Taiwan became a surprise winner in the trade war between the U.S. and China

Economic Data and Events

• China will release on Monday the Caixin PMI composite and services measures for December, and consumer-price and producer-price inflation data for the same month on Thursday
• Taiwan reports December trade figures on Tuesday, while the Philippines is due to unveil its November trade data later in the week
  Both countries will release inflation data on Tuesday
• Brazil may say on Friday that consumer price inflation edged higher at the end of the year. Investors in Latin America’s biggest economy, whose real was among the best emerging-market currencies last month, will also eye November industrial production data on Thursday
• Peru’s central bank will probably keep interest rates steady when it meets on Thursday, though it’s expected to leave the door open for further cuts. The sol — along with Mexico’s peso — was one of just two regional currencies tracked by Bloomberg that gained in 2019
• Mexico, meantime, may say on Thursday that inflation fell last month, and release data on Friday that shows industrial production dropped in November
• In Chile, data on Wednesday will probably show inflation accelerated for a third month in December. Still, the increase could be less than its central bank expected, according to Bloomberg Economics.
• A final reading of Russia’s inflation data on Friday will shed light on December’s sharper-than-expected slowdown
• Goldman Sachs Group Inc. expects inflation to fall toward 2.5% by early this year; it sees the central bank cutting rates three times to 5.5% by mid-2020, before lowering the benchmark further to 5% in 2021
• The ruble was the best performer in emerging markets last year
• Russian President Vladimir Putin visits Turkey to meet with counterpart Recep Tayyip Erdogan and inaugurate a natural gas pipeline on Wednesday
• In South Africa, a raft of data will provide guidance on the trajectory of the economy before a central-bank policy meeting later this month. Most attention will be on the manufacturing PMI for December, due on Wednesday, followed by a measure of business confidence on Thursday –Bloomberg