Stock markets remained volatile today in reaction to sharp drops in the values of currencies in several emerging markets including Turkey, Russia, South Africa and Argentina.
The TSX/S&P index took a 230-point plunge Friday morning as the dollar continued to underperform and prospects for China, a major buyer of Canadian commodities, looked weaker. By the close of trading, the Toronto market was down 1.5 per cent or 215 points to 13,717.
The Canadian dollar was ahead 0.21 of a cent to 90.31 cents US.
National Bank issued a profit outlook for Toronto-listed companies on Friday that indicates disappointments ahead as earnings season begins. With 15 companies still to report in January, 136 in February and 83 in March, the bank estimates aggregate net income for the fourth quarter will decline by 1.7 per cent.
In New York, the Dow dove by 318 points or two per cent to 15,879 at the end of the day on top of a drop of 176 points Thursday.
The Nasdaq was 90.7 points lower to 4,128.17 while the S&P 500 index was down 38.17 points to 1,790.29.
There has been a rush out of emerging currencies around the world toward the U.S. dollar after the Federal Reserve decided to reduce its monthly bond-buying program to $75 billion.
The Fed stimulus has been blamed for the 2013 stock market rally that boosted the Dow by 29 per cent on the year. But as the Fed tapers, U.S. bond yields have risen and investors are taking their money out of emerging markets.
"Pressure in the more vulnerable emerging market capital markets continues and has attracted significant global attention driving risk aversion higher on fears of possible contagion outside of the epicentres," observed Camilla Sutton, Chief FX Strategist, Managing Director Scotiabank Global Banking and Markets.
"Argentina, Turkey and South Africa are under tremendous pressure which has yet to ease."
Emerging market sell-off expected to worsen
Investors have begun a full flight from emerging markets, preferring to buy U.S. Treasuries, the yen and gold, which bounced higher Friday to $1,262 US an ounce.
Michael Purves, chief global strategist and head of equity derivatives research at Weeden, expects a lot of market volatility in the days ahead.
The current downturn “could be an excuse for traders to simply sell a market which has long term overbought conditions and still working through a consolidation in January after an incredibly strong year,” he wrote in a research note.
Still, he expects inflows to U.S. markets at the expense of emerging markets to continue, noting that markets with political uncertainty are being especially hard hit.
The Turkish lira hit a record low of 2.33 to the U.S. dollar, even after the central bank spent at least $2 billion trying to prop it up on Thursday. Turkey’s national debt is worrying investors.
Argentina moved Friday to relax restrictions on the purchase of U.S. dollars that were imposed in 2012, following a sharp slide in the peso.
Argentina is plagued by high inflation and a number of market restrictions that have kept it from issued bonds internationally for several years.
There is also uneasiness among investors about violence in Ukraine and yesterday’s report about slower growth in China, which has been fuelling emerging world economic activity.
The U.K.’s FTSE 100 index and markets in Europe and Japan moved sharply lower on Friday amid the global stock-market sell-off.
"We expect the emerging market sell-off to get worse before it starts getting better," said Lorne Baring, managing director of B Capital Wealth Management in Geneva.
"There's definitely contagion spreading and it's crossing over from emerging to developed in terms of sentiment."
A report from TD Economics noted the lack of U.S. economic data to sway markets this week, but says next week all eyes will be directed toward the Fed, with an expectation of further tapering.
"Investor attention will return to America next week. Financial markets are looking for guidance on whether the Fed will again reduce the pace of asset purchases as they did in December. We expect another $10 billion US reduction in asset purchases, bringing the monthly total to $65 billion," the report said.