EMERGING MARKETS: Oil slump pressures FX while stocks crawl higher

April 28, 2020: Developing world stocks and currencies fell on Tuesday as a fresh plunge in oil prices underscored the economic shock from the coronavirus and sapped appetite for risky assets.

Russia's rouble was among the biggest percentage losers among currencies, dropping about 0.3%, while the MSCI's index of emerging market currencies fell slightly.

Oil prices slumped on concerns over dwindling crude storage capacity and fears that fuel demand may only recover slowly from curbs on economic and social activity to stem the spread of the coronavirus.

While most emerging markets - which have large crude imports - benefit from weakness in the oil market, the resulting shock to risk appetite prompted increased capital outflows.

Still, losses were small in comparison to those seen last week when U.S. crude futures crashed into negative territory, with investors holding off large trades ahead of key European and U.S. central bank meetings later in the week.

"At present the major central banks are at comparatively expansionary levels. All of them have beefed up asset purchases as much as they could. All of them are close to or even at the minimum lower interest rate bound," wrote Thu Lan Nguyen, FX and EM Analyst at Commerzbank.

Nguyen added that the pandemic might call on central banks to resort to unconventional monetary policy to protect their respective economies.

Emerging market economies have less room to scale up liquidity, and are likely to face a larger impact from disruptions due to the outbreak.

Sweden's central bank on Tuesday held its benchmark rate at 0.0%, after having hiked it from negative territory in December. A Reuters poll expected the bank to stand pat.

Still, the bank raised the possibility of future cuts if the situation called for it. The krona firmed against the euro after the decision.

Emerging market stocks fared slightly better than currencies, with the MSCI's index of stocks rising about 0.5%.

A bulk of the index's gains for the day came for Asian stocks, with analysts holding the view that Asian emerging markets may be able to handle the outbreak far better than their EMEA or Latin American peers.

South African stocks rose about 0.7%, resuming trade after a long weekend. The rand was flat to the dollar.

Reuters