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Fed tapering fears weigh down emerging markets

Stock benchmarks and currencies in India and Indonesia have been hammereds

Gulf News

London: Concerns over the phasing out of a US central bank stimulus programme weighed on markets on Tuesday, particularly in some emerging economies.

However, the selling pressure eased as the day progressed and the main Wall Street stock indexes were steady after dropping for four consecutive trading sessions, the first such streak of 2013.

The biggest moves on Tuesday were in emerging market economies in Asia, where investors continue to take fright over the economic outlook as well as the expected change in US monetary policy. Stock benchmarks and currencies in countries such as India and Indonesia have been hammered as funds flowed out of their markets in anticipation of a reduction in stimulus from the Federal Reserve.

Indonesia’s benchmark index, which dived 5 per cent on Monday, suffered another 3.2 per cent drop on Tuesday. India’s Sensex ended down only 0.3 per cent, but that followed the 5.6 per cent slide over the previous two sessions.

India’s currency, the rupee, fell to a record low of Rs64.11 to the dollar.

US economy improves

Many investors expect the Fed will next month reduce the amount of financial assets it buys in the markets — currently $85 billion (Dh312.2 billion) a month — amid signs of improvement in the US economy. The stimulus was intended to spur borrowing and investment through easy access to liquidity. Some traders used the cheap money to buy stocks, particularly in fast-growing developing economies.

“The shift in sentiment and capital flows back towards developed markets is being keenly felt, leading to a major pick-up in volatility,” said Michael Every, an analyst at Rabobank International.

Emerging markets weren’t the only ones to be impacted by the prospect of the Fed tapering its stimulus. US bonds, for example, have been sold off as investors have priced in levels of interest rates that haven’t been seen since 2011. The rise in Treasury yields has dented stock markets in the US and around the world, admittedly at a time when trading volumes are modest due to the traditional summer lull.

The performance of US stocks has weighed on European markets even though there have been signs of an economic uptick across the continent. Last week, figures showed that the recession across the economy of the 17 European Union countries that use the euro ended in the second quarter.