EMERGING MARKETS WEEK-Obama, Brazil rate decision in focus

Sun Jan 18, 2009 3:02pm EST
By Walter Brandimarte
NEW YORK, Jan 18 (Reuters) - Emerging-market investors will focus this week on much-expected government actions to jolt the world economy out of recession, but a constant flow of bad economic data threatens to dampen the mood.
All eyes will turn on Tuesday to the inauguration of U.S. President-elect Barack Obama, following a U.S. markets holiday on Monday. Investors are anxious about the new administration's steps to stop a banking system hemorrhage and what it will do to turn the economy around.
In Latin America, the most anticipated policy response will come from Brazil on Wednesday, when the central bank will cut interest rates at least half a percentage point. For details, see [ID:nSPG000119].
With the move, Brazil will join its peers in Mexico, Chile and Colombia, which are already lowering rates to protect their economies from a more dramatic slump.
But the government response to the crisis risks being to late or too little, in face of the constant data showing a sharp economic downturn.
"It is very difficult to be even remotely optimistic on emerging markets near-term, especially given lingering event risks, rising credit-rating downgrades and corporate defaults and a pipeline of very ugly economic data due through the end of the first quarter," RBC Capital Markets' analysts wrote in a research note.
Last week's batch of gloomy economic data, coupled with news of additional bank losses, were enough to reverse an early year rally that had been triggered by hopes that government stimulus packages could shorten the ongoing world recession.
The MSCI stock index for emerging markets .MSCIEF declined 5.8 percent last week, bringing the indicator into the red for the year.
Yield spreads between emerging-market bonds and U.S. Treasuries, a key gauge of investors' aversion to risk, closed Friday at 679 basis points, almost 50 basis points above the level of 630 basis points reached on Jan. 6, according to J.P. Morgan's EMBI+ index 11EMJ. Wider spreads reflect higher aversion to risk.
While the latest data caused economists to start cutting their growth forecasts for emerging economies, this week's figures are only expected to increase the gloom.
Mexico and Brazil will report unemployment numbers for December on Wednesday and Thursday, respectively, amid several reports of layoffs in different areas of the economy.
Fourth-quarter earnings reports to be released this week will also be part of the bleak scenario, especially in the United States, where profits are forecast to have fallen more than 20 percent from the year before, according to ThomsonReuters research. (Editing by Maureen Bavdek)