By: Adrian Lowery
January 26, 2013
Shares around the world were hit yesterday as concerns over emerging markets saw global investors sell stocks and dive into safe-haven assets.
The London market sank to a five-week low, with the FTSE 100 falling 1.6 per cent as Latin American currencies like the Argentinian peso suffered massive falls.
The blue-chip index lost 109.54 points to 6,663.74 – its lowest close since December 20 – and was followed by falls on Wall Street, where the S&P 500 stock index tumbled 2.0 per cent. The Dow Jones industrial average also lost 2 per cent.
European shares suffered their biggest fall in seven months and the FTSEurofirst 300 index erased all its gains for 2014, to stand down 1.1 per cent on the year.
Traders were driven to sell by worries over slowing China growth, the prospect of the US Federal Reserve further cutting its quantitative easing programme, as well as a conflagration of political problems in Turkey, Argentina and Ukraine.
‘The world is suffering from the emerging markets’ flu,’ said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles.
The Turkish lira hit a record low as the cost of insuring against a Turkish default rose to an 18-month high.
The peso suffered its steepest daily decline since the country’s devastating 2002 financial crisis, on top of falls on Thursday, after central bank gave up a battle to prop up the currency.
Having shed more than 30 per cent of its reserves last year, the central bank this week surprised traders by abandoning intervention in the foreign exchange market.
The new policy increased worries about what is already one of the world’s highest inflation rates.
‘We expect the emerging market sell-off to get worse before it starts getting better,’ said Lorne Baring, managing director of B Capital Wealth Management in Geneva. ‘There’s definitely contagion spreading and it’s crossing over from emerging to developed in terms of sentiment.’
‘It’s just the final realization that [emerging markets] can’t continue to grow as an economy the same way they did before,’ said Andres Garcia-Amaya, global market strategist at J.P. Morgan Funds in New York.
The FTSE 100 hit a recent low of 6,440 in December but had recovered to nearly 6,840 before recent falls.
‘It’s a combination of less liquidity for these countries that depended on foreign money and China kind of throwing some curve balls as well.’
The Fed last month shaved $10billion off its monthly purchases of bonds to $75billion. The bank holds a policy meeting next Tuesday and Wednesday and is widely expected to make further reductions to its asset-buying.
Investors responded to the uncertainty by buying into safe-haven assets like the Japanese yen and Swiss franc, and highly rated government bonds. German Bund futures rose and 10-year US Treasury yields hit an eight-week low below 2.75 per cent.
Gold hit a two month high, gaining for a fifth straight week, as weaker equities burnished its safe-haven appeal. Spot gold rose to as high as $1,272.70 from $1263.95 on Thursday.
In London, Aberdeen Asset Management – the investment giant with massive exposure to emerging markets – shed 5.7 per cent, and was the FTSE’s top faller, while itsrival Ashmore was among the biggest FTSE mid-cap losers.
‘Obviously the market is separating the wheat from the chaff – Aberdeen Asset Management has got huge emerging markets exposure,’ Ed Woolfitt, head of trading at Galvan, said.
‘I won’t be charging in right here, right now, but if we find support (around) these levels over the next day or two, this would be a good buying signal for the UK equity market.’
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