(UPDATE) Global share markets turned sharply lower on Wednesday afternoon as a brief rally gave way to jitters about the scaling back of US stimulus and the impact on emerging markets.
Even another surprise interest rate rise by a major emerging market’s central bank – this time in South Africa, following hikes from India and Turkey – couldn’t lift sentiment.
These central banks are concerned about the weakness of their currencies and the risk that inflation is set to rise uncontrollably.
As well as strength on Asian and European share markets this morning, Turkey’s lira had rallied after the country’s rate hike. But those gains were soon lost as sentiment turned and emerging markets currencies sold off again: South Africa's rand fell 2.4% while Turkey's lira dropped 0.7% in volatile trade.
The US Federal Reserve is today largely expected to announce another step in the ‘tapering’ of its asset purchase scheme. The scaling back of US quantitative easing began in December, when the Fed announced a $10 billion reduction in its monthly QE splurge. Economists expect another $10 billion to be cut back, meaning monthly purchases fall to $65 billion.
On share markets the US Dow opened down 1% at 15,774. Europe’s Eurofirst 300 was trading 1.4% lower.
In London, the FTSE 100 fell 1.1% to 6,496, marking a decline of nearly 4% so far this year. Only half a dozen blue chip shares were in the black, among them Antofagasta and Anglo American, the mining companies that this morning pleased investors with production updates.
Perceived safe havens were in demand, with the gold price rising nearly 1% to $1,269 per ounce.
Global shares rally as emerging market fears abate (09:30)
An aggressive defensive manoeuvre from Turkey's central bank, following India with an interest rate hike, helped global markets towards a second day of gains on Wednesday, at least temporarily overriding angst about a potential reduction of the US stimulus after a two-day Fed meeting.
Britain’s FTSE 100 rose 0.6% to 6,612, matching gains across Europe and following on the heels of a bullish trading session in Asia; a relief rally that was prompted in part by Turkey’s emergency rate hike designed to battle inflation and a weak lira.
All eyes are now trained on the US Federal Reserve’s rate setters as they conclude their two-day meeting, at the end of which investors will find out whether the money tap is being tightened that little bit more.
The consensus among economists polled by Reuters is for the Fed’s FOMC to cut another $10 billion from its monthly bond purchase pot, meaning just $65 billion a month is pumped into markets.
Fretting over emerging markets
Investors in emerging markets will be watching particularly keenly as they fret about the impact of the continued taper on flows into these volatile regions. The prospect of this further Fed ‘tapering’ has combined with weak Chinese factory data, sharp currency declines and political instability in several key markets to spark the recent heightened fears over emerging markets.
Lars Christensen, chief analyst at Danske Bank, identified three characteristics of the emerging market sell-off: ‘The hardest hit countries are those with large external imbalances (such as Turkey and South Africa), commodity exporting countries (like Brazil and Russia) and countries with rising domestic political/regime uncertainty (such as Ukraine and Turkey),’ he wrote in a research note published yesterday.
Other investors seem content to take money off the table wholesale, grumbled Jan Dehn, head of research at emerging markets fund manager Ashmore: ‘We think EM markets are over reacting to Fed tapering and that the reaction has been far too indiscriminate. Or put differently, there is some serious dumbing down going on in financial markets right now when it comes to EM.’
That’s made for a rough start to 2014 for London shares with the greatest exposure to emerging markets: among them Aberdeen Asset Management (ADN.L) has dropped 21% so far in 2014, while smaller competitor Ashmore (ASHM.L) has lost 18% of its share value.
Two days of gains
This morning’s gains come after the FTSE 100 yesterday managed to rise 0.3%, heaving higher after five straight says of losses. It remains down 2.9% so far in 2014.
Sainsbury’s (SBRY.L) was the worst performing Footsie stock, down 2.7% to 346p, after the supermarket chain announced that chief executive Justin King was to leave the company after ten years. He leaves on a high, having stolen market share from bigger rival Tesco
The blue chip index didn’t suffer the usual round of shares trading ex-dividend on Wednesday morning. However a quartet of FTSE 250 listed firms – Bankers Investment Trust, Fenner, Merchant Trust and Pennon Group – were trading without their dividend appeal.