AMSTERDAM (AP) — Global stock markets sold off Friday as investors were spooked by a possible slowdown in emerging economies, the main engine of growth since the 2008 financial crisis, and the prospect of tighter monetary policy in developed countries.
If interest rates in the U.S. or Europe rise, huge investment flows are likely to shift toward their economies, even if emerging markets may have better long-term growth potential.
Those issues added to country-specific concerns — about the stability of the government in Turkey or, in Argentina, the central bank’s ability to defend the currency.
“Equities are in freefalls as fears over Argentina’s stability have sent shockwaves throughout global markets,” said IG Market Analyst David Madden.
“Simply put, dealers are taking their money out of equities and into safe haven assets like gold.”
In the U.S., the Dow Jones Industrial Index fell 1.2 percent to 16,004.47 and the broader S&P 500 index shed 1.3 percent to 1,804.58.
In Europe Germany’s DAX plunged 2.5 percent to close at 9,392.02 while Britain’s FTSE 100 fell 1.6 percent to 6,663.74. France’s CAC 40 dropped 2.8 percent to 4,161.47.
The run on emerging currencies began Thursday after a survey indicated a contraction in Chinese manufacturing activity in January for the first time since July. Days earlier, a report showed GDP growth was slowing.
Emerging market currencies, some of which depend greatly on demand for raw materials from China, reacted the most.
The South African rand, Russian ruble, Turkish lira, and especially the Argentinian peso — which fell 13 percent Thursday — have been “trounced,” said Jane Foley, a currency strategist at Rabobank.
“Talk that the U.S. Federal Reserve will announce another reduction in its monthly bond purchases next week … (is also) contributing to a loss of confidence in some emerging markets,” she said.
If the Fed policy leads to rising interest rates, the U.S. should become a more attractive place to invest, draining liquidity from emerging markets and leading to further currency outflows there.
In Asia, the pain was keenest in Japan, as demand for a safe-haven currency — the yen — surged, dampening prospects for its export-driven economy. The Nikkei 225 slipped 1.9 percent to close at 15,391.56
Elsewhere in Asia, Hong Kong’s Hang Seng shed 1.3 percent to 22,450.06 and Seoul’s Kospi dropped 0.4 percent to 1,940.56. Shares in Australia, New Zealand, Singapore, Malaysia, Indonesia and the Philippines sagged.
Somewhat paradoxically, China’s Shanghai Composite Index was the exception, regaining 0.6 percent to 2,054.39 after a sharp drop Thursday.
In energy markets, benchmark U.S. crude contract for March delivery followed stocks lower, falling 73 cents $96.59 in electronic trading on the New York Mercantile Exchange. Recent cold weather in much of the U.S. has led to declining heating fuel oil reserves and higher natural gas prices, pushing oil higher in a knock-on effect.
While major currencies gained against those of the developing countries, in the largest currency pairs, the euro eased slightly against the dollar after a one percent surge Thursday on improving European manufacturing data. It was trading down 0.1 percent at $1.3682 Friday.
The dollar fell strongly against the yen, down 0.9 percent to 102.34. Dollar-yen trading may continue to be volatile through the day as most economists are expecting Japanese trade figures Monday to show the country is continuing to run a large deficit due to high energy costs — a negative for the yen.