Dow suffers worst week in months

Worldwide instabilities trigger investor worries

Worries over China’s growth are among con-cerns that abound at the New York Stock Exchange.
Worries over China’s growth are among con-cerns that abound at the New York Stock Exchange.

NEW YORK — U.S. stocks on Friday saw their biggest one-day decline since June, capping the worst week for benchmark indexes since 2012, as a sell-off in developing-nation currencies spurred concern global markets will be more volatile.

The Dow slid 318.24 points, or 2 percent, to 15,879.11 on Friday. The 30-stock gauge lost 3.5 percent this week. About 8.8 billion shares changed hands on U.S. exchanges, the busiest trading day of the year.

For the week, the Dow fell 3.5 percent and the Nasdaq fell 1.7 percent. The Dow’s weekly drop was the steepest since November, 2011.

“The volatility of the emerging markets and the currency impacts are affecting U.S. markets,” said Eric Teal, chief investment officer at First Citizens BancShares in Raleigh, N.C. “Following the strong gains of last year, I think it’s to be expected that you might have an overreaction here of selling.”

The Standard & Poor’s 500 index retreated 2.1 percent to 1,790.29 to close at the lowest level since Dec. 17. The benchmark index declined 2.6 percent this week.

“There’s definitely some nervousness. The world is suffering from the emerging markets’ flu,” said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles.

Emerging markets were hit by worries about slowing growth in China as well as political problems in Turkey, Argentina, and Ukraine.

With many market participants expecting the Federal Reserve to decide next week to shave its stimulus by another $10 billion a month, investors have become worried that interest rates will soon begin to rise. Fed policymakers conclude a two-day meeting Wednesday.

“You’ve had a massive selloff in these emerging-market currencies,” said Nick Xanders, a London-based equity strategist at BTIG. “Ruble, rupee, real, rand: They’ve all fallen and the main cause has been tapering. A lot of companies that have benefited from emerging-markets growth are now seeing it go the other way.”

The damage is expected to be worse in places that have relied on demand for raw resources in China, whose economic advance is slowing.

Worries over China’s growth surfaced after a disappointing manufacturing number spurred the S&P 500’s 0.9 percent drop Thursday.

The damage has been particularly severe in countries that are already suffering from political instability.

Turkey’s currency fell to a record low against the dollar Friday, a drop that will hit the purchasing power of everyone in the country.

Argentina’s government said Friday that it would relax stringent foreign-exchange controls, after it abandoned its long-standing policy of intervening to support the peso currency. That resulted in the currency’s steepest plunge since the 2002 financial crisis.

The concerns about developing economies are being heightened by the Fed’s recent decision to begin pulling back on the bond-buying stimulus programs that have helped keep interest rates low around the world.

Many countries that had come to rely on those low rates could face a surge in borrowing costs and a painful readjustment. Many emerging countries could also be hurt if investors choose to pull their money to chase returns in the recovering economies in the United States and Europe.

“A lot of these currencies are getting trashed and people’s standards of living are going down,” said Michael Purves, the chief global strategist at Weeden & Co. “There is a potential for social unrest to accelerate.”

The slump this week was the first serious break in a long stock market rally that took the broad U.S. stock market up nearly 30 percent last year, fueled by signs of an economic recovery.

The rise had led many to expect some pullback.

“This is a convenient and healthy short-term pullback,” said David Lafferty, the chief market strategist for Natixis Global Asset Management. “The market really needs some time to digest last year’s gains.”

In the rest of the world, the damage so far is less severe than it was during similar turmoil in emerging markets last summer, when the Fed first talked about easing its bond-buying programs.

Most markets bounced back from that episode.

But there is a growing recognition that the developing world will not be the engine of growth that it has been for much of the last decade.

In China, the economy is still growing faster than almost anywhere, but the pace is slowing and the government is intent on developing an economy that is less focused on exporting goods. This is weighing on everything from the soybean industry in Brazil to the nickel mines of Mozambique.

For some countries, though, the recent problems have been relatively independent of China.

Because many emerging market economies rely on low interest rates, their fate will depend, in part, on the Fed’s decisions about how to pull back on its bond-buying programs.

In December, the Fed decided to cut back its monthly purchases for the first time, to $75 billion from $85 billion.

Next week, the Fed is to announce whether it will continue to reduce 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 Friday.

Economists are watching the United States for any signs that it is vulnerable to the weakness overseas or that the economic recovery is slowing independently.

The most recent monthly employment report showed a sharp slowdown in job creation and data this week showed home sales slightly lower than expected.

But the main U.S. indexes are still within a few percent of their record highs.

U.S., German, and British bonds have been benefiting as investors seek them out as a refuge from the turmoil in riskier assets.

The yield on the 10-year Treasury note fell to 2.72 percent, from 2.78 percent on Thursday, after hovering near 3 percent earlier this month.

An array of U.S. economic data has continued to point to an economic recovery that is gaining strength and could actually benefit if investors are looking for somewhere to put money that was previously in developing countries.