Emerging markets tumble

It’s predictable event. When the center is in crisis, money is being repatriated (voluntarily or forced) as risk appetite lessens. Explains part of the dollar rally as well. Ironic, that. The mess originated in the US, and what happens, it spreads like a contageous virus and the dollar ends up rallying..

The dollar is also up because Europe is in a bigger mess than thought only a month ago, and further rate cuts can be expected from the European Central Bank (ECB).

Crisis reverberates from Hungary to Wall St
By Claudia Parsons

  • NEW YORK (Reuters) – Stocks, currencies, oil and commodities tumbled on Wednesday and governments from Budapest to Buenos Aires resorted to emergency action to rescue their economies from the worst financial crisis in 80 years.
  • The White House set a date of November 15 for the first of a series of international crisis summits that will bring together the G20, which includes major industrial economies plus key emerging-market countries like China, India and Brazil.
  • Three weeks away and coming after the November 4 U.S. presidential election, the summit is unlikely to do more than kick off a process towards international financial system reforms. Europeans have been pressing for a major revamp.
  • In the meantime, governments scrambled to fix the immediate problems threatening to overwhelm their economies.
  • Hungary hiked interest rates to defend the forint, Ukraine, Pakistan, Iceland and Belarus sought IMF help, currencies tumbled against the dollar and yen and U.S. companies announced heavy job cuts and weaker earnings.
  • Major U.S. stock indexes dropped more than 4 percent, oil fell 7 percent to a 16-month low below $68 and commodities slumped on the soaring dollar and fears of a global recession.
  • Battered U.S. bank Wachovia, which will be taken over by Wells Fargo, posted a $23.9 billion (14.56 billion pound) third-quarter loss, a record for any banking company in the crisis.
  • AT&T and Boeing were among companies reporting weaker-than-expected earnings, and drugmaker Merck said it would cut 7,200 jobs.
  • We started the week off in good spirits about the credit market loosening up and then the onslaught of earnings hit us,” said Arthur Hogan, chief market analyst at Jefferies & Co.
  • One welcome sign was that interbank borrowing costs mostly fell, with further steep falls in dollar rates and spreads indicating that the flood of liquidity pumped into the banking system in recent weeks is easing money market strains.
  • But emerging market stocks, sovereign debt and currencies all came under intense pressure.
  • The dollar and the yen were gainers as investors moved out of riskier assets in other currencies.
  • Standard Bank G10 currency strategist Steve Barrow said in a note to clients that markets were seeing a massive unwinding of the speculative asset bubble of recent years.
  • “History shows that, when bubbles burst, no amount of glue, from slumping Libor rates or anywhere else, can stick them back together again. The law of ‘what goes up must come down’ has to work its way through and, right now, it is working its way through the currency market with a vengeance,” Barrow said.
  • The banking crisis that started in developed markets is leading to steep falls in emerging markets, as investors are forced to retrench, analysts and traders said.
  • Hungary ratcheted up interest rates by three full points to 11.5 percent to defend its forint currency.
  • Argentina’s bonds fell 7 percent and stocks lost 16 percent after President Cristina Fernandez sent a bill to Congress on Tuesday to nationalize the country’s private pension system, sending markets into freefall.
  • Labour leaders and lawmakers from Argentina’s ruling party applauded the nationalization as a way to guarantee pensions at a time of global economic turmoil, but the market verdict was negative.
  • Belarus’ central bank said it had requested credit from the International Monetary Fund, and Ukrainian Prime Minister Yulia Tymoshenko said she expected Kiev to receive substantial financial aid from the IMF next week.
  • The IMF is also ready to help Pakistan, which needs funds to avoid a balance of payments crisis, and Iceland, driven close to bankruptcy as frozen credit markets caused its banks to fail.
  • It’s not that the fundamentals for emerging markets have changed. Capital is now moving back from the emerging world to the developed world,” said Neil Dougall, chief emerging markets economist at Dresdner Kleinwort.
  • The overarching fear was recession, a topic that will be weighing on the minds of world leaders at the G20 summit to be held in the Washington, D.C., area.
  • The White House said it would seek input for the summit from whoever wins the November 4 U.S. presidential election.
  • Minutes from the Bank of England’s last meeting, at which it joined a coordinated round of rate cuts, said the UK economy had deteriorated substantially and BoE governor Mervyn King said it was probably entering its first recession in 16 years.
  • The Dow and S&P 500 fell more than 4 percent. European shares ended down 5 percent and Japan’s Nikkei average ended down 6.8 percent.
  • In emerging markets, MSCI’s sector index was at its lowest since June 2005, and sovereign debt spreads widened beyond 700 basis points over Treasury yields for the first time since early 2003.
  • Currencies other than Hungary’s forint were also battered, with the Turkish lira falling to the lowest in more than two years and South Africa’s rand at its lowest in more than six years against the dollar.
  • The latest market turmoil came despite some optimistic words from officials about the financial crisis, which has prompted billions of dollars in rescue and liquidity packages from governments around the world.
  • Bank of England governor King said that the worst may have passed for the financial system.
  • “We are far from the end of the road back to stability,” he said late on Tuesday. “But the plan to recapitalize our banking system, both here and abroad, will, I believe, come to be seen as the moment in the banking crisis of the past year when we turned the corner.”
  • Emerging powerhouse Russia, whose markets have been battered, also signalled improvements in bank lending.
  • “The interbank (lending) has started working normally. The rates are high but coming down. Banks have started crediting sectors again. But we still need two or three weeks for the situation to start improving,” the Financial Times quoted First Deputy Prime Minister Igor Shuvalov as saying.

Although many battered emerging markets have little or nothing to do with the credit crisis, it doesn’t help if they start scoring own goals, like Argentina, as we reported earlier today.