Emerging market sell-off spreads

A trader looks at his screens as he works on the floor of the New York Stock exchange on Thursday. US stocks fell broadly after a survey from China suggested that manufacturing in the world’s second-largest economy was contracting. — AP

A full-scale flight from emerging market assets accelerated on Friday, setting global shares on course for their worst week this year and driving investors to safe-haven assets including US Treasuries, the yen, and gold.

Wall Street opened lower, extending selling to a second day. Concerns about slower growth in China, reduced support from US monetary policy and political problems in Turkey, Argentina and Ukraine drove the selling.

The Turkish lira hit a record low. Argentina’s peso fell again after the central bank abandoned its support of the currency.

The declines mirror moves from last June when developing country stocks fell almost 18 per cent over about two months and hit global shares.

The broad nature of this sell-off combines country-specific problems with the reality that reduced US Federal Reserve bond buying reduces liquidity that has in the past boosted higher-yielding emerging markets assets.

“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.”

Activity was heavy in exchange-traded funds focused on emerging markets. The iShares Morgan Stanley EM ETF was the second-most active ETF in New York trading, trailing only the S&P 500’s tracking ETF.

An MSCI index of emerging market shares was down 1.4 per cent. Since mid-October, the index has lost more than 9 per cent. The MSCI all-country world equity index was down one per cent.

Funds have continued to flee the sector. In the week ended January 22, data from Thomson Reuters Lipper service showed outflows from US-domiciled emerging market equity funds of $422.41 million, the sixth week of outflows out of the last seven.

ECB, other central banks scale back US dollar facility FRANKFURT — The European Central Bank and other major central banks said on Friday they are scaling back their emergency supply of US dollars to banks as economic and financial conditions improve. The ECB, Bank of England, Bank of Japan and Swiss National Bank have decided to “gradually reduce” their offerings of US dollar liquidity-providing operations, the ECB said in a statement. During the financial crisis, banks have sometimes been compelled to resort to their central bank to borrow US dollars when access to the funds dried up. But fewer and fewer banks have been making use of the facility in recent months amid signs that the crisis is fading and economies are gradually recovering. As a result, banks have found it easier to obtain financing via financial markets rather than having to resort to the central bank. “In view of the considerable improvement in US dollar funding conditions and the low demand for US dollar liquidity-providing operations, the above-mentioned central banks will gradually reduce their offering of US dollar liquidity-providing operations,” the ECB said. The ECB said that it and the other central banks would continue to conduct US dollar operations at three-month maturity until April 30. One-week operations would be continued until at least July 31. — AFP

Emerging market debt funds saw the 32nd week of outflows out of the last 35, with $200 million in net redemptions from the 250 funds tracked by Lipper.

The Turkish lira hit a new record low of 2.33 to the dollar, even after the central bank spent at least $2 billion trying to prop it up on Thursday.

Turkey’s new dollar bond, first sold on Wednesday, fell below its launch price. The cost of insuring against a Turkish default rose to an 18-month high and Ukraine’s debt insurance costs hit their highest since Kiev agreed a rescue deal with Russia in December.

Argentina decided to loosen strict foreign exchange controls a day after the peso suffered its steepest daily decline since the country’s 2002 financial crisis . On Friday, it was down 2.8 per cent.

On Wall Street, the S&P 500 lost 12.72 points or 0.7 per cent, to 1,815.29.

European shares were down, especially in firms exposed to emerging markets, tracking Asian stocks lower. Spain’s IBEX index, highly exposed to Latin America, lagged other regional bourses, falling 2.9 per cent.

The dollar index edged lower after losing 0.9 per cent against a basket of major currencies, including the euro, yen, Swiss franc and sterling, on Thursday. That was its worst one-day performance in three months.

A flight to safety lifted currencies backed by a current account surplus, such as 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 traded close to its highest level in nine weeks and was poised for a fifth straight weekly climb as weaker equities burnished its safe-haven appeal. Spot gold rose to $1266.90, up from $1263.95.