Jason Decrow/Associated Press Traders at the New York Stock Exchange on Friday.
Updated, 9:20 p.m. | The ascent of developing countries over the last decade has been fueled by two global trends: the steady rise of China and the willingness of the Federal Reserve to stimulate the economy.
Now, with both trends starting to retreat, investors have been heading for the exits in markets as far removed as Buenos Aires, Istanbul and Beijing, with effects spilling over into the rest of the world.
A decline this week picked up speed and spread around the globe on Friday, leading to the first sustained drop in United States stock indexes in 2014. The Standard & Poor’s 500-stock index fell 2.1 percent on Friday, to end its worst week since June 2012.
But the damage is expected to be worse in places that have relied on demand for raw resources in China, whose economic advance is slowing. An index of Chinese manufacturing growth released on Thursday showed that the most important cog in the country’s economy, the world’s second-largest, was contracting for the first time in six months.
The damage has been particularly severe in countries that are already suffering from political instability, like Turkey and Argentina. Turkey’s currency fell to a record low against the dollar on Friday, a drop that will hit the purchasing power of everyone in the country.
On a street corner in Istanbul, Yilmaz Gok, 51, said, “I’m a retiree making ends meet on a small pension and all I care about is a possible increase in prices.”
“I will need to cut further,” he said. “Maybe I should use my natural gas heater less.”
The concerns about developing economies are being heightened by the Fed’s recent decision to begin pulling back on the bond-buying stimulus programs that have helped keep interest rates low around the world. Now, many countries that had come to rely on those low rates could face a surge in borrowing costs and a period of painful readjustment. Many emerging countries could also be hurt if investors choose to pull their money to chase returns in the recovering economies in the United States and Europe.
“A lot of these currencies are getting trashed and people’s standards of living are going down,” said Michael Purves, the chief global strategist at Weeden & Company. “There is a potential for social unrest to accelerate.”
The slump this week was the first serious break in a long stock market rally that took the broad United States stock market up nearly 30 percent last year, fueled by signs of an economic recovery. The extent of the rise had led many sophisticated investors to expect some kind of pullback in American stocks.
“This is a convenient and healthy short-term pullback,” said David Lafferty, the chief market strategist for Natixis Global Asset Management. “The market really needs some time to digest last year’s gains.”
In the rest of the world, the damage so far is less severe than it was during similar turmoil in emerging markets last summer, when the Fed first talked about easing its bond-buying programs. Most markets ended up bouncing back from that episode. But there is a growing recognition that the developing world will not be the engine of growth that it has been for much of the last decade.
In China, the economy is still growing faster than almost anywhere else, but the pace is slowing and the government is intent on developing an economy that is less intent on exporting goods. This is weighing on everything from the soybean industry in Brazil to the nickel mines of Mozambique.
For some countries, though, the recent problems have been relatively independent of China.
In Argentina, the government’s efforts to fend off inflation and artificially support the local currency backfired. This week, the government acknowledged the problem when it allowed the value of the peso to drop and made it easier to buy dollars, but that only spurred a greater sense of crisis. The peso finished the week down 16 percent. Many analysts have said that the government still has to deal with the fundamental problem of rampant inflation.
Some of the most drastic moves have been in Turkey, one of the largest emerging economies. On Friday, the Turkish lira was trading at 2.314 a dollar, creeping above 2.3 for the first time, after the central bank failed in its effort to control the slide.
Turkey had been one of many places where business magnates had used the Fed’s low interest rates to pay for a building boom. It is now unclear whether Turkish businesses will be able to pay off those loans if interest rates rise.
The country has also been plunged into political turmoil, which is hurting business confidence. In late December, Prime Minister Recep Tayyip Erdogan became entangled in a battle with the Gulen movement, a powerful pro-Islamic network and once a close ally of the government.
On Friday, Mr. Erdogan accused the country’s largest business group of treason after its chairman warned about a possible retreat of global investors if the government continued political moves that endangered the country’s democratic system. The business group had forecast that Turkey’s economy would grow 3.4 percent in 2014, as opposed to a government projection of 4 percent.
Because Turkey and many other emerging market economies rely on low interest rates, their fate will depend, in part, on the Fed’s future decisions about how to pull back on its bond-buying programs. In December, the Fed decided to cut back its monthly purchases for the first time, to $75 billion from $85 billion. Next week, the Fed is scheduled to meet and announce whether it will continue to reduce its bond purchases.
“Emerging markets can’t seem to escape the shadow of the Federal Reserve,” Andrew Wilkinson, the chief market analyst at Interactive Brokers, wrote to clients on Friday.
Economists are carefully watching the United States for any signs that it is vulnerable to the weakness overseas or that the economic recovery is slowing independently. The most recent monthly employment report showed a sharp slowdown in job creation for the first time in months and data this week showed that home sales came in slightly lower than expected.
But the main American indexes are still within a few percent of their record highs. The S.&P. 500 ended Friday down 2.1 percent, or 38.17 points, at 1,790.29, bringing it down 3.1 percent for the year. The Dow Jones industrial average fell 2 percent, or 318.24 points, to 15,879.11. The Nasdaq composite index fell 2.2 percent, or 90.70 points, to 4,128.88.
United States, German and British bonds have been benefiting as investors seek them out as a refuge from the turmoil in riskier assets. The yield on the 10-year Treasury note fell to 2.72 percent, from 2.78 percent on Thursday, after hovering near 3 percent earlier this month.
An array of United States economic data has continued to point to an economic recovery that is gaining strength and could actually benefit if investors are looking for somewhere to put money that was previously in developing countries.
“There’s a part of this that actually strengthens the U.S.,” Mr. Purves said. “You may have a flight to the best house on the block.”
Reporting was contributed by Keith Bradsher in Hong Kong, Sebnem Arsu in Istanbul and Jonathan Gilbert in Buenos Aires..
This post has been revised to reflect the following correction:
Correction: January 24, 2014
An earlier version of this article misstated the day that the Standard and Poor’s 500-stock index was down about 1.2 percent at one point. It was Friday morning, not Monday.
Updated, 9:20 p.m. | The ascent of developing countries over the last decade has been fueled by two global trends: the steady rise of China and the willingness of the Federal Reserve to stimulate the economy.
Now, with both trends starting to retreat, investors have been heading for the exits in markets as far removed as Buenos Aires, Istanbul and Beijing, with effects spilling over into the rest of the world.
A decline this week picked up speed and spread around the globe on Friday, leading to the first sustained drop in United States stock indexes in 2014. The Standard & Poor’s 500-stock index fell 2.1 percent on Friday, to end its worst week since June 2012.
But the damage is expected to be worse in places that have relied on demand for raw resources in China, whose economic advance is slowing. An index of Chinese manufacturing growth released on Thursday showed that the most important cog in the country’s economy, the world’s second-largest, was contracting for the first time in six months.
The damage has been particularly severe in countries that are already suffering from political instability, like Turkey and Argentina. Turkey’s currency fell to a record low against the dollar on Friday, a drop that will hit the purchasing power of everyone in the country.
On a street corner in Istanbul, Yilmaz Gok, 51, said, “I’m a retiree making ends meet on a small pension and all I care about is a possible increase in prices.”
“I will need to cut further,” he said. “Maybe I should use my natural gas heater less.”
The concerns about developing economies are being heightened by the Fed’s recent decision to begin pulling back on the bond-buying stimulus programs that have helped keep interest rates low around the world. Now, many countries that had come to rely on those low rates could face a surge in borrowing costs and a period of painful readjustment. Many emerging countries could also be hurt if investors choose to pull their money to chase returns in the recovering economies in the United States and Europe.
“A lot of these currencies are getting trashed and people’s standards of living are going down,” said Michael Purves, the chief global strategist at Weeden & Company. “There is a potential for social unrest to accelerate.”
The slump this week was the first serious break in a long stock market rally that took the broad United States stock market up nearly 30 percent last year, fueled by signs of an economic recovery. The extent of the rise had led many sophisticated investors to expect some kind of pullback in American stocks.
“This is a convenient and healthy short-term pullback,” said David Lafferty, the chief market strategist for Natixis Global Asset Management. “The market really needs some time to digest last year’s gains.”
In the rest of the world, the damage so far is less severe than it was during similar turmoil in emerging markets last summer, when the Fed first talked about easing its bond-buying programs. Most markets ended up bouncing back from that episode. But there is a growing recognition that the developing world will not be the engine of growth that it has been for much of the last decade.
In China, the economy is still growing faster than almost anywhere else, but the pace is slowing and the government is intent on developing an economy that is less intent on exporting goods. This is weighing on everything from the soybean industry in Brazil to the nickel mines of Mozambique.
For some countries, though, the recent problems have been relatively independent of China.
In Argentina, the government’s efforts to fend off inflation and artificially support the local currency backfired. This week, the government acknowledged the problem when it allowed the value of the peso to drop and made it easier to buy dollars, but that only spurred a greater sense of crisis. The peso finished the week down 16 percent. Many analysts have said that the government still has to deal with the fundamental problem of rampant inflation.
Some of the most drastic moves have been in Turkey, one of the largest emerging economies. On Friday, the Turkish lira was trading at 2.314 a dollar, creeping above 2.3 for the first time, after the central bank failed in its effort to control the slide.
Turkey had been one of many places where business magnates had used the Fed’s low interest rates to pay for a building boom. It is now unclear whether Turkish businesses will be able to pay off those loans if interest rates rise.
The country has also been plunged into political turmoil, which is hurting business confidence. In late December, Prime Minister Recep Tayyip Erdogan became entangled in a battle with the Gulen movement, a powerful pro-Islamic network and once a close ally of the government.
On Friday, Mr. Erdogan accused the country’s largest business group of treason after its chairman warned about a possible retreat of global investors if the government continued political moves that endangered the country’s democratic system. The business group had forecast that Turkey’s economy would grow 3.4 percent in 2014, as opposed to a government projection of 4 percent.
Because Turkey and many other emerging market economies rely on low interest rates, their fate will depend, in part, on the Fed’s future decisions about how to pull back on its bond-buying programs. In December, the Fed decided to cut back its monthly purchases for the first time, to $75 billion from $85 billion. Next week, the Fed is scheduled to meet and announce whether it will continue to reduce its bond purchases.
“Emerging markets can’t seem to escape the shadow of the Federal Reserve,” Andrew Wilkinson, the chief market analyst at Interactive Brokers, wrote to clients on Friday.
Economists are carefully watching the United States for any signs that it is vulnerable to the weakness overseas or that the economic recovery is slowing independently. The most recent monthly employment report showed a sharp slowdown in job creation for the first time in months and data this week showed that home sales came in slightly lower than expected.
But the main American indexes are still within a few percent of their record highs. The S.&P. 500 ended Friday down 2.1 percent, or 38.17 points, at 1,790.29, bringing it down 3.1 percent for the year. The Dow Jones industrial average fell 2 percent, or 318.24 points, to 15,879.11. The Nasdaq composite index fell 2.2 percent, or 90.70 points, to 4,128.88.
United States, German and British bonds have been benefiting as investors seek them out as a refuge from the turmoil in riskier assets. The yield on the 10-year Treasury note fell to 2.72 percent, from 2.78 percent on Thursday, after hovering near 3 percent earlier this month.
An array of United States economic data has continued to point to an economic recovery that is gaining strength and could actually benefit if investors are looking for somewhere to put money that was previously in developing countries.
“There’s a part of this that actually strengthens the U.S.,” Mr. Purves said. “You may have a flight to the best house on the block.”
Reporting was contributed by Keith Bradsher in Hong Kong, Sebnem Arsu in Istanbul and Jonathan Gilbert in Buenos Aires..
This post has been revised to reflect the following correction:
Correction: January 24, 2014
An earlier version of this article misstated the day that the Standard and Poor’s 500-stock index was down about 1.2 percent at one point. It was Friday morning, not Monday.
