Stocks Dragged Down by Slump in Emerging Markets

Jason Decrow/Associated Press

Stock markets fell around the world on Friday as investors worried about an economic slowdown in emerging markets.

The concerns led to the first sustained decline in United States stock indexes in 2014. The Standard & Poor's 500-stock index was down about 1.3 percent at midday on Friday, bringing it down 2.3 percent for the year so far. The Dow Jones industrial average was down 1.3 percent and 3.5 percent for the year. The downturn was much worse elsewhere, with the Euro Stoxx 50 index falling 2.8 percent, bringing it into the red for 2014.

The declines this week have been fed by disappointing economic news out of China and the rest of the developing world. An index of Chinese manufacturing growth released on Thursday showed that the sector was contracting for the first time in six months.

A number of slightly disappointing economic data points in the United States has led to some concern that a slowdown in China could be contagious. On Thursday, data on home sales came in slightly lower than expected.

Franz Wenzel, chief strategist at Axa Investment Managers in Paris, said problems in emerging markets have helped to create 'a bit of a fear factor. And if a general risk aversion starts to creep in, that affects every market.'

'I wouldn't call it a panic,' Mr. Wenzel said. An extended bull market in stocks has left investors unprepared for red indexes on their screens, he said, as investors 'just aren't used to seeing this kind of volatility.'

The pessimism in the markets came after a nearly unbroken market rally that has lasted for months. Many strategists had been anticipating some kind of pullback.

Charles Diebel, head of market strategy at Lloyds Banking in London, said investors who had been enjoying high-risk, high-return investments were now leaving emerging markets and equities and into the perceived safety of United States, German and British government bonds.

But he played down the degree of unease among investors, saying, 'there's no indication of anything systemic. It's just the market mechanism at work.' The damage, though, could be greater in other parts of the world.

For most of the past decade, except for a fairly brief interlude during the depths of the global financial crisis, the world's emerging markets seemed to be the main beneficiaries of two global trends: the seemingly inexorable rise of China and the willingness of the Federal Reserve to pursue an accommodative monetary policy.

Now neither trend seems so reliable, and emerging markets are paying a heavy price. Since the Fed officially announced in December that it would ease its bond-buying stimulus, investors in emerging markets have been cautious. There are fears that rising interest rates will choke off growth in countries dependent on foreign lenders. This week, the currencies in several countries, including Turkey and Argentina, have been falling sharply. Next week, the Fed is scheduled to meet and announce whether it will continue to lower 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.

As for the other trend, from the soybean farms of Brazil to the coal mines of Indonesia and from the palm oil plantations of Malaysia to the nickel mines of Mozambique, emerging markets seemed until very recently to have an inexhaustible market in China. As China has emerged as the world's biggest producer and biggest market for everything from steel to cellphones to cars, the demand from China for raw materials soared year after year.

But now, after investors have committed tens of billions of dollars to emerging market projects aimed at meeting China's voracious demand, the Chinese suddenly looks less unquenchable than previously thought. Chinese economic growth slowed to 7.7 percent last year and the latest surveys of manufacturers in China show that with the exception of a few exporters, the mood is darkening and expectations about future sales are falling.

The result in recent days have been waves of cash washing out of emerging markets and into industrialized countries, notably the United States. As the money has begun to leave, investors who still had their money parked in places like Buenos Aires or Jakarta have started to question whether their investments will retain their value as well, prompting the beginnings of what is starting to look like a race for the exits.

This is putting pressure on Europe, where the economy emerged from recession last year - but just barely. Recent data, including from a purchasing managers' survey on Wednesday have suggested the pace may be picking up. But unemployment remains about 12 percent, and earnings season has gotten off to a poor start, with a wide range of European businesses reporting results below market expectations.

Keith Bradsher contributed reporting from Hong Kong and David Jolly from Paris. 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 & Poor's 500-stock index was down about 1.2 percent at one point. It was Friday morning, not Monday.