FTSE cries for Argentina as currency woes spread

Bad times on equities markets as investors react to routs in Argentinian, Turkish and Chinese currencies.

by Emma Haslett
Last Updated: 31 Jul 2014

Not a great start to the week if equities are your bag: the FTSE 100 opened almost 2.8% down after a storm of bad-ish news battered the Good Ship Global Finance Sector over the weekend.

This is all linked to various woes in emerging markets. To wit: last week, Argentina’s peso fell 12% as its central bank scaled back efforts to support it, while the Turkish lira dropped to an all-time low against the dollar as its central bank put $2bn into the foreign exchange market in the hope it would shore up the currency. Alas, it didn’t work: this morning the lira fell to 2.3616 against the dollar, a record low.

Elsewhere, the Indonesian rupiah dropped 0.5% - close to a five-year low, while the Russian rouble opened nearly 1% lower against the euro at 47.54, also a record low. On the bright side, at least lots of records are being broken…

What’s going on? To put it bluntly, investors are suffering from a crisis of confidence in emerging markets. The likes of Russia and China did well during the recession as investors looked for new (risky, ergo relatively high-yielding) places to stash their cash – but now the confidence pendulum has swung back in the direction of the more established markets, liquidity in emerging economies is falling fast.

‘Looking ahead, the outlook remains poor,’ CrossBorder Capital managing director Michael Howell told the FT this morning. ‘In contrast to 15 years ago, most emerging market economies are now more dependent on the Chinese economy rather than on the currently more dynamic US economy.’

And China isn’t exactly a picture of glowing health. Last night the Shanghai Composite Index fell 1% as analysts continued to worry that an economic slowdown will damage profits and the People’s Bank of China injected even more funds into its financial system.

Not surprisingly, other Asian markets (which are eight or so hours ahead) slipped overnight, with Japan’s Nikkei dropping 2.5% (although Japan also posted its 18th consecutive monthly trade deficit, which will have affected it), while Hong Kong’s Hang Seng fell by 2.1% and South Korea’s Kospi dropped by 1.6%.

All eyes, then, will be on the US and its tapering: when then-Fed chairman Ben Bernanke originally tested the water in May last year by hinting that it might think about maybe easing back its programme of quantitative easing soon, investors went similarly berserk, taking cash out of emerging markets. As a result, tapering didn’t begin in earnest until December.

If this turmoil continues, there’s a chance current Fed chair Janet Yellen will consider slowing down on the tapering front in the hope that investors will calm themselves. If we’re honest, though, it’s unlikely. The US is keener than ever to prove its recovery is in full swing.

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