Global Markets Slip After Fed's Decision on Stimulus

HONG KONG - Stock markets in the Asia-Pacific region sold off again on Thursday after the Federal Reserve's decision to continue scaling back its stimulus of the United States economy and amid lingering nervousness about political and economic instability in several big emerging market economies.

Leading the declines was the Japanese stock market, which closed 2.5 percent lower as investors fretted about the potential toll that a stronger yen might be taking on the earnings of the country's important export sector.

The key stock indexes in Singapore, Indonesia and the Philippines fell 0.7 percent by midday. The Hang Seng Index in Hong Kong closed down 0.5 percent, and Australia ended 0.8 percent lower.

In mainland China, which closes for a weeklong holiday starting Friday, the Shanghai composite index slipped 0.6 percent.

The Fed's decision to roll back its economy-bolstering bond purchases by another $10 billion, announced by the departing chairman, Ben S. Bernanke, on Wednesday, had been widely expected in view of the fact that the United States economy appears poised for faster growth.

But it nevertheless highlighted once again the prospect that emerging markets will no longer attract as much foreign cash as they have for much of the time since the global financial crisis.

With interest rates in the Unites States and Europe at record lows for much of the last five years, investors sent large amounts of cash into fast-growing emerging markets in search of the higher returns that were available there. Faster growth in the United States and the prospect of rising interest rates as the Fed slowly dismantles its stimulus have changed that rationale, however, causing the flows to ebb or reverse.

This has generated problems in countries like India, Argentina, Turkey and South Africa, which have come to depend heavily on the overseas cash inflows to fund their current account deficits and have seen their currencies fall sharply over the past few months.

'The problem is that if the U.S. injects less liquidity, many of these countries will have problems plugging their deficits,' said Norman Chan, head of investment at Calibre Asset Management in Hong Kong. The volatility in many key emerging market currencies, and political uncertainties in countries like Turkey and Ukraine, he said, have generated a 'risk-off' sentiment among investors.

The central banks in Turkey and South Africa have raised interest rates sharply this week in a bid to stem the plunge in their currencies. Others, like Brazil, Indonesia and Chile, may follow.

But the moves have done little so far to shore up confidence in those countries. The number of Turkish lira or Argentine pesos it costs to buy a dollar are both near record highs, and the South African rand is at its weakest since 2008.

The fact that currencies have continued to weaken even in countries that have started to raise interest rates 'opens up a new, and potentially more worrying, phase' of the recent turmoil in emerging financial markets, in which beleaguered policy makers find themselves unable to defend their currencies, analysts at Capital Economics wrote in a note on Thursday. They stressed, however, that it was important 'to recognize key differences between individual emerging economies.'

Amid the rising nervousness, investors have sought refuge in assets like the Japanese yen, which is perceived as relatively safe.

The yen was trading at 102.34 yen per dollar on Thursday. That compared with 104.70 yen a week ago, when the current bout of nervousness about emerging markets erupted.

Adding to the general unease are mounting signs that the Chinese economy - which had become a major engine for global growth in recent years - has lost much of its earlier vigor.

Last week, a measure of activity in the country's manufacturing economy showed a slowdown in January. That reading, which had been based on preliminary calculations, was confirmed on Thursday, at 49.5 points, down from 50.5 in December.

'The Fed statement gave a new lease on life' to the emerging market stress, which had started to fade on Tuesday, Tim Condon, a strategist at ING in Singapore, wrote in a note. Concerns about slowing growth in China also are likely to be 'a source of occasional bouts' of emerging market stress this year.