Shares tumble again after Fed cuts economic stimulus

Investors today shrugged off central bank efforts to shore up battered emerging markets, selling stocks and bonds and further weakening tumbling currencies.

It added pressure on more countries to raise interest rates to seek a halt to a major capital flight.

Fears about emerging economies intensified after the US Federal Reserve withdrew more of its monetary stimulus yesterday and a measure of Chinese manufacturing hit a six-month low earlier today.

The benchmark MSCI emerging equity index fell 0.8 per cent to a fresh four- month low.

The Irish Iseq index of shares was down 34.79 points or 0.5 per cent at 4,688, broadly with its European counterparts. London’s FTSE was down 16 points or 0.26 per cent at 6,527; Germany’s Dax was 25 points or 0.27 per cent down at 9,311.69 while France’s Cac was 11 points or 0.28 per cent down at 4,145.43.

Earlier Japan's Nikkei dropped 2.4 per cent to 15,007.06.

Large interest rate hikes from Turkey and a less-aggressive rise in South Africa yesterday, along with a surprise monetary tightening from India earlier this week, have failed so far to halt the sell-off in emerging assets.

If the mood spreads, further portfolio outflows would pressure growth in many emerging economies which are especially reliant on external capital, potentially setting off a vicious circle of investment outflows.

"The concern here comes with the fact that we've had major emerging central banks resort to tighter policy rates to defend their currencies, but have failed fairly miserably," said Abbas Ameli-Renani, emerging market strategist at RBS. "In general, central banks are being forced by the turn of events, and now have their backs against the wall... We've only scratched the surface here with EM flows, and there's a lot more potential for outflows."

The Turkish lira fell more than 1 per cent to 2.2810 per dollar, approaching record lows set earlier this week and fully erasing gains made after the central bank surprised the market with a whopping 425 basis point rate hike. Local stocks lost 1.3 percent. The lira’s one-month implied volatility shot above 20 per cent yesterday, its highest in nearly 5 years.

The South African rand also ignored a surprise 50 basis point hike from the central bank yesterday, hitting a fresh five-year low of 11.38 per dollar. The yield on benchmark government bonds jumped 36 bps to 7.36 per cent.

The pressure was expected to mount on other central banks to act to counter inflation and support their currencies, especially in Russia and Mexico. "We are most likely only at the beginning of a global monetary tightening cycle, where the weakest are being forced to act first," SEB said in a note to clients.

Reuters