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Emerging Markets Take Brunt of Fed Tapering Fears

Tuesday, 20 August 2013 07:20 AM

Concerns over the phasing out of a U.S. central bank stimulus program weighed on markets Tuesday, particularly in some emerging economies.

Wall Street's stock indexes, however, rose after dropping for four consecutive trading sessions, the first such streak of 2013.

The biggest moves Tuesday were in emerging market economies in Asia, where investors continue to take fright over the economic outlook as well as the expected change in U.S. monetary policy. Stock benchmarks and currencies in countries such as India and Indonesia have been hammered as funds flowed out of their markets in anticipation of a reduction in stimulus from the Federal Reserve.

Indonesia's benchmark index, which dived 5 percent on Monday, suffered another 3.2 percent drop Tuesday. India's Sensex ended down only 0.3 percent, but that followed the 5.6 percent slide over the previous two sessions. India's currency, the rupee, fell to a record low of 64.11 rupees to the dollar.

Many investors expect the Fed will next month reduce the amount of financial assets it buys in the markets — currently $85 billion a month — amid signs of improvement in the U.S. economy. The stimulus was intended to spur borrowing and investment through easy access to liquidity. Some traders used the cheap money to buy stocks, particularly in fast-growing developing economies.

"The shift in sentiment and capital flows back towards developed markets is being keenly felt, leading to a major pick-up in volatility," said Michael Every, an analyst at Rabobank International.

Emerging markets weren't the only ones to be impacted by the prospect of the Fed tapering its stimulus. U.S. bonds, for example, have been sold off as investors have priced in levels of interest rates that haven't been seen since 2011. The rise in Treasury yields has dented stock markets in the U.S. and around the world, admittedly at a time when trading volumes are modest due to the traditional summer lull.

The performance of U.S. stocks has weighed on European markets even though there have been signs of an economic uptick across the continent. Last week, figures showed that the recession across the economy of the 17 European Union countries that use the euro ended in the second quarter.

In Europe, the FTSE 100 index of leading British shares fell 0.2 percent to close at 6,453.46 while Germany's DAX fell 0.8 percent to 8,300.03. The CAC-40 in France underperformed its counterparts for the second day running, and dropped 1.4 percent to 4,028.93.

In the U.S., the Dow Jones industrial average was up 0.4 percent at 15,070.83 while the broader S&P 500 index rose 0.7 percent to 1, 657.41.

The Fed will likely remain the focus of attention in markets over the rest of the week, especially on Wednesday, when the minutes to the Fed's July policy meeting are published. Investors will be looking for any hints of when the bank might begin cutting back on its stimulus.

"Many are now anticipating the July minutes could strengthen the view that the central bank could soon taper its bond-buying program," said Lee Mumford, a trader at Spreadex.

Earlier, in Asia, it wasn't just the emerging markets suffering. Japan's Nikkei 225 index, the regional heavyweight, tumbled 2.6 percent to finish at 13,396.38, its lowest close since June 27. Hong Kong's Hang Seng dropped 2.2 percent to 21,970.29 while Australia's S&P/ASX 200 lost 0.7 percent to 5,078.20. South Korea's Kospi fell 1.6 percent to 1,887.85.

Trading in the currency markets was fairly choppy with the euro 0.7 percent higher at $1.3424 and the dollar 0.4 percent lower at 97.18 yen.

Oil prices were soft, with the benchmark New York rate down 21 cents at $106.89 a barrel.

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Shares around the world, particularly those in emerging economies, fell as investors braced for the phasing out of a U.S. central bank stimulus program that has shored up markets for the past few years.
Tuesday, 20 August 2013 07:20 AM
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