Emerging markets were hit by a new wave of stock and currency sales, and Indonesia, Saudi Arabia, and China were among the countries hit by tensions in the trade war and the strengthening of the dollar.
European shares also fell on Wednesday as investors registered concerns over the impact on the global economy if more emerging markets were to follow Argentina and Turkey into financial crisis.
Markets weighed the threat of a new development in the US-China trade war – fresh US tariffs on another $200bn (£155bn) of Chinese goods could be confirmed as soon as Friday – as well as weak Chinese service-sector growth figures and news this week that South Africa is in recession.
The dollar rose for a fifth day, making it more expensive for emerging market countries to repay their dollar-denominated debts, while commodities fell, led by oil. City investors tend to buy US dollars – seen as the global reserve currency – during periods of financial market turbulence. This can however exacerbate the difficulties facing emerging market nations.
Christophe Barraud, an economist at the Paris-based brokerage Market Securities, said: “People are looking closely at what’s happening in emerging markets, at the trade war and the fact that the United States is likely to implement another wave of tariffs against China. If you look at global growth, more and more signs are that it will slow in coming months.”
The raising of interest rates by the US Federal Reserve has further strengthened the dollar, with economists growing increasingly concerned that the fallout for developing nations may be on a par with the emerging market crises of the 1990s. Tighter monetary policy under the former Fed chair Alan Greenspan triggered a series of crises across the developing world.
Low interest rates used since the financial crisis have depressed investors’ returns on developed market debts, pushing them to invest more money in emerging markets to seek greater returns, exacerbating the problem further.
In Asia, Hong Kong’s Hang Seng posted its biggest loss in 11 weeks on Wednesday, falling 2.6%, while the Shanghai Composite index fell 1.7% and the Shenzhen Composite dropped 1.6%. The sell-off spread to the Middle East, where the Saudi stock exchange fell 3.1%.
Indonesian stocks took their biggest tumble in nearly two years, with the Jakarta stock exchange down 3.8%. The rupiah’s fall to 20-year lows prompted the country’s authorities to intervene to prop up the currency and bond markets. President Joko Widodo said the government’s priority was to increase investment and exports to rein in Indonesia’s current account deficit.
India’s rupee hit a record low of 71.78 to the dollar, prompting its central bank to intervene, according to Reuters. South Africa’s rand slid again, by 1%.
Emerging market fears also contributed to a tough day for European shares, with the FTSE 100 closing down 1%, Germany’s Dax shedding 1.4% and the CAC in Paris falling 1.5%.
In Buenos Aires, Argentina’s government is trying to negotiate an accelerated $50bn rescue package from the International Monetary Fund. Its president unveiled fresh austerity measures on Tuesday and admitted the country faced an “emergency” in a plea to international lenders and investors, following the peso’s collapse in recent days.
Lukman Otunuga, an analyst at the currency broker FXTM, said: “It has certainly been a terrible trading week thus far for most major emerging market currencies as investors begin to compare the ongoing pressure to the 1997 Asian financial crisis.”
Currency weaknesses can cause problems for countries by pushing up import costs, which leads to a rise in inflation, as seen in Britain following the vote to leave the EU. Government and central bank policy responses to control the rising cost of living can have a damaging effect on economic growth, such as higher interest rates or austerity measures, meaning a general slowdown for developing nations may be looming on the horizon.
Despite the concerns over emerging markets, many investors have so far remained sanguine about the risk of the crisis spreading to damage the stability of the global financial system, or lowering developed nation economic growth. But that risk has steadily been increasing.
William Jackson, chief emerging markets economist at the consultancy Capital Economics, said the bigger risk was from a potential slowdown in the US or China, although he added: “There is little evidence to suggest that the market turmoil is translating into widespread macroeconomic strains.”