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Pain just beginning for emerging markets, still no light at end of tunnel

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By Jameel Ahmad, Global Head of Currency Strategy & Market Research at FXTM

The emergency airdrop of fiscal and monetary support in the battle against the coronavirus impact on the global economy continues to prevent further dives in world markets. This battle is, of course, not receiving a helping hand from the climbing numbers of the disease and fatalities, which currently stands close to 344,000 cases globally and more than 15,000 fatalities in 187 countries.

There is a need for reality for those who might think a floor in world markets should be approaching after weeks of viscous declines that markets can still drop much further. For all the declines seen in world markets, some equity markets that are only just approaching 2012 levels and even US stock markets are at 2016 levels, having at the end of last week erased the gains made since President Trump was elected.

Should the situation get further out of control, and there is still a stronger probability of this being the case than a miraculous cure developed anytime soon, there is a likelihood that world equity markets can decline as much as 65% from their peaks. If this is accurate, then taking only US markets into account we are still at the half-way line of the possible market carnage.

In the event that world markets decline towards 65% from peaks, the coronavirus pandemic disaster will far eclipse the beyond 50% declines experienced during the global financial crisis twelve years ago.

As unfavorable as the above reads, there is also an unfortunate reality of which emerging markets need to be aware that collectively they are still at the early stages of the journey for market chaos.

Both the Indian Rupee and South African Rand declined to new record lows on Monday, while the Indonesian Rupiah weakened beyond 3.8%. USDMYR has approached 4.44, and it looks to be a matter of time before the Malaysian Ringgit approaches 4.50. For the Indian Rupee, 80 is possible. And for USDZAR 20 is realistic

Emerging markets are also facing an episode of double trouble arriving from both world stock market volatility, as well as driving demand for the USD. The Dollar Index appears to be on the road to gradually advancing to 105, which resonates to carnage for emerging market (EM) currencies, as well as the EURUSD, GBPUSD, AUDUSD and of course Gold. Questions remain over how long the USD can remain above 100 for, although I do not think a direct intervention in the market is possible because this will risk spooking investors even further in a fragile environment.

EURUSD is valued 1.0684, although the situation in Italy and other EU nations that is progressing in a worse case suggests that only a significant decline in USD demand can prevent the Eurodollar falling towards January 2017 lows.

 

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