According to a report from the Wall Street Journal, the selloff in emerging markets continued Friday, sending currencies in places such as Turkey and South Africa to fresh lows and spreading to the bond market, as investor concerns mounted over how the developing world will cope with the withdrawal of global stimulus.
The Turkish lira fell to a record low for the 10th straight day, while the South African rand and Russia's ruble also hit new, multiyear lows. The Indian rupee and the Israeli shekel, which had withstood Thursday's exodus, also succumbed as jitters spread across currencies.
"Global emerging markets are now trading in full-blown panic mode," said Benoit Anne, global head of emerging-market strategy at Société Générale in London.
Riskier assets around the globe came under pressure Thursday, with stocks falling in several markets. U.S. stocks fell, with the Dow Jones Industrial Average hovering near 16000, a level it hadn't seen since mid-December.
Investors' fears that emerging-market countries may not be able to support their currencies or prop up their growth have escalated in recent days on a combination of local and global factors. This latest round of unwinding comes on increasing concerns that China—a key driver of global demand—is slowing down again. This comes at a time when the U.S. Federal Reserve is expected to accelerate the withdrawal of its bond purchase program, which had provided global liquidity.
The improved economic outlook for the developed world—from the U.S. to Europe—also has investors positioning themselves for a shift in global growth patterns. Over the past decade, heady growth in emerging economies and their resilience after the global credit crisis drew investors in hordes to these countries. But the current slackening in their pace of growth, fall in global demand for commodities and lack of reforms in many of these countries have all contributed to investors' disappointment.
Capital flows into the developing world have fallen to 4.5% of their gross domestic product this year from a high of 7% in 2008, according to the Institute of International Finance.
Still, the latest slump pales in comparison to declines seen in May and June of last year, when the Fed began to signal that it was considering how to wind down its bond purchases. MSCI Inc.'s Emerging Markets Currency index fell by 0.4% on Thursday, but it saw bigger drops than that on 20 occasions last year.
Turkey has seen its currency plunge 6.1% so far this year. The country's debt also fell, with its recently issued 10-year bonds trading one point lower at a price of 97.25 cents to the dollar. Turkey issued this dollar-denominated bond Wednesday, just before the latest selloff began.
Investors say the country's political uncertainty and high current-account deficit mean they should get paid more in compensation for holding Turkey's bonds. But, the hesitation by Turkey's central bank to raise policy rates earlier this week was a disappointment to investors, and triggered the fall in the country's asset prices.
The current situation puts the central banks of developing countries in a squeeze. If they raise interest rates to support their currencies and fight inflation, that would also tighten the flow of credit and slow domestic economic growth. But a failure to raise rates at the right time can diminish the central bank's credibility.
Argentina's central bank, in a surprise move this week, allowed the currency to slide as a way to preserve the country's dwindling dollar reserves. In late morning trading on Friday, the dollar was up 1.75% at 8.040 pesos.
