U.S. Markets Tumble as Fear Spreads

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By Prabha Natarajan, Nicole Hong and  Chris Dieterich
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U.S. stocks tumbled Friday to their biggest loss in more than seven months, extending a global selloff that investors fear signals turmoil to come as financial markets adjust to a pullback in central-bank stimulus.

The declines extend a dark beginning of the year for equity investors world-wide, a jarring drop for markets that climbed imperviously through 2013.

The Dow Jones Industrial Average fell 318.24 points, or 2%, to 15879.11. The Stoxx Europe 600 lost 2.39%, and Germany’s DAX, down 2.48%, had its sharpest fall in months. The Nikkei also fell 1.94%.

While those drops were dramatic, much of the pain of investors’ readjustment is landing on developing economies, from Brazil and India to Thailand and South Africa.

In recent years they were buoyed by the high tide of cash from the U.S. Federal Reserve’s stimulus and by China’s voracious growth.

Now, those forces are receding, with the Fed expected to reduce monthly bond purchases again on Wednesday.

Investors are pulling back with them.

“We’re looking at how U.S. policy will hurt the emerging markets,” said Robert Glownia, quantitative analyst at RiverFront Investment Group, which manages about $4.1 billion in exchange-traded funds. “We don’t think the tail is going to wag the dog.”

Michael Ganske, head of emerging markets at Rogge Global Partners in London, said he sold currencies this week of countries such as Thailand and Chile that export heavily to China. On Thursday and Friday, emerging-market currencies dropped after a report showed a manufacturing slowdown in China.

“When you have hiccups in a big market like China, that will have a direct impact on global growth and export demand for many developing countries,” Mr. Ganske said. Rogge has $58 billion in assets under management.

Most investors—Mr. Ganske among them—are confident that emerging markets’ long-term growth will outpace that of the developed world. Economic progress marches onward. Middle classes blossom.

But navigating the short term is difficult. Slowing growth in China could crimp demand from goods and services from its trading partners.

At the same time, a shifting Federal Reserve policy could alter the tides of capital flowing through the world economy. As the Fed has pumped dollars into the U.S. financial system to boost growth at home, waves of investment money have flooded into markets overseas in search of returns that beat exceptionally low U.S. interest rates, pushing up prices there.

Now, as the Fed steps back, the prospect of higher returns in the U.S. promises to pull that money back in. Investors in emerging markets are struggling to figure out how much compensation to demand for their risks, especially in economies that appear weak.

That has been on display for months in Turkey, where a political corruption scandal and weak economic fundamentals have combined to punish the Turkish lira. The central bank has been unable to arrest its slide, and investors in Turkish assets are sitting on big losses. The lira slumped almost 2% Friday, to 2.34 per dollar.

Other emerging-market currencies, including the Peruvian sol and the South African rand, suffered as well. Stocks have taken a hit, too. Turkey’s main stock index is down 4.4% in the last two days; Brazil’s Bovespa is down 3.1%. A widely traded emerging-markets bet, the iShares MSCI Emerging Markets exchange-traded fund, is down 5%.

The rout has left Paul Zemsky, chief investment officer of multiasset strategies for ING U.S. Investment Management, wondering whether he could unload more emerging-market holdings. He initially cut his emerging-markets exposure in the fourth quarter of last year.

“It’s too early to buy emerging markets, but it’s probably too late to sell,” said Mr. Zemsky, whose firm manages $200 billion.

Friday’s swoon was notable for its breadth—nearly all major equity markets were in the red. In foreign-exchange markets, the selloff began with currencies such as the South African rand and Turkish lira that have been viewed as vulnerable because of sluggish domestic growth. But it soon spread to currencies of countries with relatively solid fundamentals, such as Mexico’s peso and South Korea’s won. Currencies also slid in Eastern Europe.

Some investors were wary of calling it panic just yet. “It remains to be seen whether the weakness deepens or contagion spreads further but much will depend on institutional investor flows,” said Nima Tayebi, emerging-market currencies portfolio manager for J.P. Morgan Asset Management. “So far there is nervousness but little signs of outflows.”

Officials from the U.S. Treasury and the International Monetary Fund declined to comment Friday on the market turmoil. But top officials from the IMF, the World Bank and Treasury have been warning about the risk of volatility in emerging markets, particularly those with weak economic fundamentals.

The developments over the last several days aren’t a surprise, said Hung Tran, executive managing director of the Washington-based Institute for International Finance, which represents big banks, insurance firms, hedge funds and pension funds.

“This brings to a head vulnerabilities that have been building for some time,” Mr. Tran said.

Several big emerging-market countries, Turkey among them, are running large deficits with the rest of the world—on a broad measure they import more than they export. That makes them dependent on financing from abroad to make up the difference.

As investors become less likely to provide it, the countries get squeezed. One way to right the balance is to increase exports, but China’s deceleration makes that tough for its competitors and trading partners. A weaker currency is another option—it both potentially sparks exports, making them cheaper on world markets, and discourages imports, which get more expensive at home—but it comes at the cost of boosting payments on foreign debt.

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A trader works on the floor of the New York Stock Exchange Friday.  REUTERS

Investors in a country’s bonds, attuned to that spiral, pull out. That pushes harder on the currency.

Buying emerging-market stocks is also tricky because of the risk of losing money on currency fluctuations. Indeed, emerging-market stocks have floundered for years. The MSCI emerging markets equities index, priced in dollars, stood Friday at close to its level of four years ago. The Dow is up more than 50% in that period.

Some investors believe more comparative weakness is in store as the Fed withdraws its stimulus, known as quantitative easing, or QE. The U.S.’s recovery appears sturdy—which, after all, is why the central bank feels comfortable paring back.

At the same time, a slowdown in the growth of U.S. company earnings is raising some concern among investors, despite generally solid fourth-quarter numbers so far.

“Because the Fed was full speed on QE last year, some of these blemishes were pushed to the background,” said Peter Boockvar, chief market analyst at the Lindsey Group, an economic advisory firm. “Once QE goes away, these will come back into focus.”

—Alexandra Scaggs and Ian Talley contributed to this article.

Write to Prabha Natarajan at prabha.natarajan@wsj.com, Nicole Hong at nicole.hong@wsj.com and Chris Dieterich at chris.dieterich@wsj.com

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2 Responses to “U.S. Markets Tumble as Fear Spreads”

  1. theyenguy Says:

    I have two comments:

    1) Yes indeed the fall in emerging market currencies has been quite dramatic; the driving factor has been the rise in the Benchmark Interest Rate ^TNX.

    Under the rule of the libertarian despised Creature from Jekyll Island, mankind experienced the Means of Economic Inflationism, that is the Benchmark Interest Rate, ^TNX, driving inflation in both fiat money, defined as Aggregate Credit, AGG, coupled with Major World Currencies, DBV, and Emerging Market Currencies, CEW, as well as fiat wealth, defined as World Stocks, VT, Nation Investment, EFA, and Global Financials, IXG, ever higher.

    But when the bond vigilantes gained control of the US Ten Year Note, ^TNX, calling it higher from 2.48, on October 23, 2013, fiat money died in a deflationary extinction event. Then fiat wealth died the week of January 24, 2014, as investors derisked out of debt trade investments and deleveraged out of currency carry trade investments, forcing World Stocks, VT, Nation Investment, EFA, and Global Financials, IXG, lower in another deflationary extinction event.

    The Benchmark Interest Rate, ^TNX, was the Means of Economic Inflationism, but after the pivotal event of October 23, 2013, it is now the Means of Economic Destructionism, establishing economic deflation and economic recession, terminating economic inflation and economic growth.

    2) Please consider that the dramatic fall in the emerging market currencies was of epic consequence; please consider that the week ending January 24, 2013, World Stocks, VT, and the US Dollar, USD, UUP, as well as Major World Currencies, DBV, and CEW, traded lower on the failure of trust, terminating liberalism and introducing authoritarianism, both as a paradigm and an age of regional governance and totalitarian collectivism.

    According to the Apostle Paul in Ephesians 1:10, Jesus Christ is the Operative Genius of the economy of all things, and through His dispensation, that is His administrative oversight for the completion of all things economic and political in every age. In the era of liberalism, He provided social mobility to the wily investor, to those successfully engaged in clientelism, and to a broad number of those lived as beneficiaries of debt trade investing and currency carry trade investing, under the Milton Friedman Free To Choose floating currency system which began in 1971 when President Nixon took the US off the gold standard to finance the Vietnam War.

    The subprime crisis led to the financial system crash of 2008; and it is likened to a fatal automobile crash that killed all the occupants. Regeneration of economic life came through Paulson’s Gift, that being Ben Bernanke’s QE1 and TARP, which traded out “money good” US Treasuries for Distressed Investments, such as those traded in Fidelity Mutual Fund FAGIX.

    Jesus Christ provided liberalism as an economic domain, that is a place for economic experience, where He rules in dispensation. It was trust in Ben Bernanke and his monetary policies, that began liberalism’s terminal phase as both a paradigm and age, where the investor and clients living in clientelism were the centerpiece of economic life, whose experience was shaped by floating currencies in a Zero Interest Rate regime.

    Economic life was through fiat money, defined as Aggregate Credit, AGG, and Major World Currencies, DBV, and Emerging Market Economies, CEW; but it died on October 23, 2013, when Jesus Christ opened the First Seal of the Scroll of End Time Events, and released the Rider on the White Horse, to effect a global economic and political d’etat, which terminated the Creature from Jekyll Island, and birthed the Beast of Revelation 13:1-4, which is rising to rule the world in the new economic domain of authoritarianism.

    Fiat wealth, defined as the output of economic life under liberalism, consisting of World Stocks, VT, Nation Investment, EFA, and Global Financials, IXG, died on January 24, 2013, with the failure of investor’s trust in the monetary policies of the world central banks monetary authority, and the collapse of freedom of choice provided by democratic nation state governance as is seen in numerous places such as the Ukraine.

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