Emerging market worries bear down on Wall Street

Emerging market worries sent stocks down in Wall Street by over 2%, down 318.24 points to 15879.11, a five-week low.

The S&P 500 fell 2.1%, ending the day at 1790.29.

The Nasdaq Composite Index dropped 2.2%, 90.70 points to 4128.17. European stock markets also caught the jitters with widespread falls across the continent.

Most economists and traders believe that the US Federal Reserve will decide to further trim back its bond-buying stimulus program by another $10 billion per month when it meets next week.

Traders have spent the last two days selling off emerging market stocks and currencies.

Doug Crofton, head of US cash equity trading at Bank of America Marril Lynch, said to The Wall Street Journal “There’s a lack of buyers supporting the market and incremental sellers who are de-risking on the back of the macro developments. I don’t think the market was positioned for the recent events.We’re not seeing people throw in the towel,” or selling indiscriminately in a rush to get out of the market.”

The S&P 500 had had its worst week since June 2012, and Wall Street since September 2011.

Emerging markets either wobbling or falling

After trying to defend the peso on Wednesday, Argentina’s central bank abandoned all efforts to prop up its national currency, allowing it to fall 11% in one day, its greatest decline since 2002.

The Turkish lira today depreciated by 1.9% against the dollar to another record low, the South African rand fell 1%, and Ukraine’s hryvnia slid to a four-year low.

The Bovespa, Brasil’s largest stock exchange located in Sao Paulo, fell by more than 1% today, closing below 48,000 (47,787) for the first time in nearly six months.

The iShares MSCI Emerging Markets exchange-traded fund fell 2.6% on almost double its average volume for the day.

The International Monetary Fund’s deputy-director, Min Zhu, said at the World Economic Forum Annual Meeting in Davos, Switzerland, that it is watching the violent fluctuations around the world “very carefully”. He added that the effect of the scaling back of the Fed’s stimulus program is encouraging a drying up of global liquidity.

If you combine this with a slow structural crisis in several emerging economies, and you have a very unstable situation, he added. “[countries that resist market reforms] will face trouble,” Zhu added.

Gold futures, typically a haven in unsettled times, rose 0.2% today to a two-month high of $1,264.50 an ounce.

Bad news coming out of China

Investors were disconcerted by a Chinese survey on Thursday indicating that its manufacturing sector has declined in January.

Another factor was a series of disappointing company results this week. Boeing Co., General Electric Co., and Caterpillar Inc. slid at least 2.6% this week in the Dow Jones Industrial Average (Wall Street), while Kansas City Southern nosedived 15%, its biggest retreat since 2008 after reporting disappointing earnings.

The BBC quoted Anastasia Amoroso, a global market strategist at JP Morgan Funds, who said “[news over the past week was] making the market very sensitive and very vulnerable to growth expectations in emerging markets”.

The Telegraph quoted Nariman Behravesh, chief economist at IHS Global Insight who said that the Federal Reserve’s tapering was the “straw that broke the camel’s back [for the BRICS]. They benefited hugely from the credit boom, a commodities super-cycle propelled in large part by China’s double-digit growth rates and “hyper-globalization” as multinational corporations expanded global supply chains. But all three effects are now falling away. They squandered their opportunity. Productivity has plummeted and they face daunting structural challenges. Without major microeconomic reforms, a return to the BRICS party of the 2000s is unlikely. Turn out the lights.”