Emerging market equities posted their largest drop in almost seven months on Monday to lead a global stocks sell-off, while United States shares pared early gains as sentiment continued to sour.
Reuters reported on Monday that concerns about China’s economic slowdown and its shadow banking sector, combined with expectations that the US Federal Reserve will scale back its bond buying further, have put pressure on emerging markets dependent on external financing.
Political risks in Ukraine, Turkey and Thailand, as well as a looming financial crisis in Argentina, are compounding the problem of emerging markets in a week when the Fed is expected to cut its monthly bond purchases by another $10bn.
The Turkish lira edged back from record lows, however, after the central bank announced an emergency policy meeting, raising market hopes that it would ignore political pressure and implement a decisive rate hike to protect its currency.
The safe-haven yen and the Swiss franc gave back part of last week’s gains against the US dollar, which also benefited from expectations the Fed may continue to reduce monetary stimulus this week.
On Wall Street, strong earnings from Caterpillar gave a boost at the open, but the company’s focus on cost cutting and continued weak sales added to weaker-than-expected December home sales data and the initial rebound evaporated quickly.
“Earnings gave investors hope but the reality of all the moving parts of emerging markets and weak home sales made them rethink how good results from a handful of companies really are,” said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.
She said investor concern highlighted the complexity of global markets. “This is a clockwork mechanism and when the tiniest thing goes wrong, the clock stops working”