A week of coups, scandal and political instability took their toll on the world’s emerging markets last week as fears of a looming United States-led economic slowdown triggered a bout of selling by jittery investors.
Bonds, shares and currencies in the smaller, developing economies of Eastern Europe, Asia, Africa and Latin America suffered from the flight out of risky, but high-yielding assets and into safer havens. With markets already tense after the coup in Thailand and the admission by Hungary’s socialist government that it had lied about the health of the economy to win power, investors were dealt a fresh double blow by last Thursday’s weak economic news in the US and the collapse of Poland’s coalition government.
Analysts said the sell-off had been prompted by the business index published by the Philadelphia Federal Reserve. This detected the first fall in factory output from the mid-Atlantic states in three years and raised concerns that the deterioration in the US housing market was spreading to manufacturing.
The gloom was compounded by a warning from one of the US’s leading housebuilders that trading conditions were tough and unlikely to improve over the coming months. The Federal Reserve pegged interest rates at 5,25% this week, but an early reduction to boost the economy is thought unlikely amid anxiety over inflation.
After months of turning a blind eye to potential problems in emerging markets, investors cited current account deficits in Turkey and South Africa, the allegations of smear tactics by President Lula da Silva in the pending election in Brazil, a possible debt default in Ecuador and the ousting of the prime minister in Thailand as the reasons for the new mood of caution.
Gavin Redknapp, economist at Standard Chartered, said: ”We are going through a period of risk aversion, which is mainly being spread by political unease in Hungary, Brazil, Poland and Ecuador. This has heightened the uncertainty of emerging markets.”
The rand fell to a three-year low against the dollar after the latest trade data, the Turkish lira was down 2% against the greenback, and the currencies of the Czech Republic, Slovakia, Hungary, Poland and Romania were all under downward pressure. Brazil’s currency fell to a two-month low, while the stock market traded at its lowest level in three months. Elisabeth Gruie, of BNP Paribas, said: ”Worries over the US and global growth are making their way back to emerging markets.
”Given wobbly politics across the board, fears of a default in Ecuador, and a reversal of commodity markets, that’s all adding to an overall wave of bearishness across the currencies.”
Debt spreads — the difference between the interest rate on bonds in emerging markets and those of US treasury bonds — widened as investors demanded a higher price for holding riskier assets.
In recent months, the gap has been narrow in anticipation that the fastest four-year spell of growth since the early 1970s would continue to benefit the world’s poorer regions. Bonds in the developed world were the main beneficiaries of the flight to quality, with United Kingdom gilts staging one of their biggest rallies this year. — Â