World stocks tumble, hitting emerging markets as the dollar rises

New York — Equities around the world took a dive on Wednesday, with emerging-market stocks set to confirm a bear market and the dollar hitting a 13-month high, while weakness in China’s yuan rattled investors’ nerves.

While fears of a crisis in Turkey still loomed, China was in sharp focus as the yuan sagged nearly 0.8% to 6.9467 to the dollar, hitting its weakest level since January 2017 following disappointing economic data earlier this week.

The data stoked speculation whether the People’s Bank of China would intervene with more fiscal stimulus to stem its currency from breaking through the seven-yuan mark.

“Today investors are waking up to the idea that the situation in China may be pretty impactful as far as global markets go,” said Emily Roland, head of capital markets research at John Hancock Investments. “With China being the engine of global economic growth, if you start to see their currency weaken significantly because of the slowdown we’re seeing there and you start to see the dollar meaningfully increase, there could become a point where there’s a liquidity issue globally.”

Turkey’s lira eked out a second day of gains as authorities tightened the screws on foreign investors aiming to short the currency. But the country’s failure to tackle galloping inflation kept investors fearful that Turkey was headed for a full-blown crisis and debt defaults.

Investors stepped up safe-haven holdings of the dollar due to worries about China and Europe’s exposure to Turkey, which pushed the euro to its weakest level in more than a year. The dollar index rose 0.07%, with the euro down 0.1% to $1.1331.

“The dominant theme in financial markets at the moment is the strength of the dollar,” said Sunil Krishnan, Aviva Investors head of multi-asset funds. “We see scope for that move to continue. One of the big challenges to risk appetite in markets is if the dollar moves continue and put pressure on riskier assets, such as emerging-market bonds, and so on.”

MSCI’s emerging-markets index was last down 2% from Tuesday, after having fallen more than 20% from its January intra-day high earlier in the day. Latin American currencies also slid along with commodities.

The Dow Jones Industrial Average fell 264.95 points, or 1.05%, to 25,034.97; the S&P 500 lost 31.73 points, or 1.12%, to 2,808.23; and the Nasdaq Composite dropped 128.41 points, or 1.63%, to 7,742.48.

The pan-European FTSEurofirst 300 index lost 1.59% and MSCI’s gauge of stocks across the globe shed 1.32%. The CBOE Volatility Index, Wall Street’s so-called “fear gauge,” jumped to a more than six-week high of 16.86, showing rising demand for protection against a near-term drop in US stocks. The index was last up 2.9 points at 16.21.

Benchmark 10-year notes last rose 12/32 in price to yield 2.8533%, from 2.895% late on Tuesday.

The backdrop to all this is the escalation in global trade tensions, with Beijing lodging a complaint to the World Trade Organisation (WTO) to determine the legality of US tariff and subsidy policies. Turkey has also raised tariffs on some US products “in response to the US administration’s deliberate attacks on our economy”, vice-president Fuat Oktay wrote on Twitter.

US crude oil fell 3.36% to $64.79 a barrel and Brent was last at $70.61, down 2.55% on the day.

Reuters