US-Iran tension puts emerging market forecasts in doubt

Put those 2020 forecasts for emerging markets on hold. The goalposts just moved.

The US assassination of Iran’s General Qasem Soleimani has sent such a shudder through risk assets, eclipsing much of the optimism stemming from the impending signing of an initial trade deal between the US and China.

Middle Eastern stock markets nosedived on Sunday, continuing a selloff that began at the end of last week as news emerged that Soleimani had died in a drone attack ordered by President Donald Trump, raising US-Iran tension to a new level.

Developing nation stocks, currencies and bonds remained on the back foot yesterday. “The threat of a severe retaliation by Iran will keep investors alert,” ING Group 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 US-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 US 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 interest rate decisions in Peru, Poland, Romania and Israel. Taiwan has a presidential election on Saturday. Economic data and events

China yesterday released Caixin PMI composite and services measures for December. Both indexes were lower than the previous month, but still showed expansion. China is due to unveil consumer price and producer price inflation data for the same month on Thursday.

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 currency was among the best performers in emerging markets last month, will also eye November industrial production data on Thursday.

A final reading of Russia’s inflation data on Friday will shed light on December’s sharper-than-expected slowdown

Goldman Sachs Group expects

For now investors remain in wait-andsee mode.

Chris Turner

ING Group strategist

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.

Russian President Vladimir Putin will meet his Turkish counterpart, Recep Tayyip Erdogan, tomorrow.

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 tomorrow, followed by a measure of business confidence on Thursday.

– Bloomberg