Fear grips markets as investors worry about China's growth and US profits

PUBLISHED : Sunday, 26 January, 2014, 5:29am
UPDATED : Tuesday, 28 January, 2014, 5:23pm

Fear is back in the market. Investors are worried about slower economic growth in China, a gloomier outlook for US corporate profits and an end to easy-money policies in the United States and Europe. They're also fretting over country-specific troubles around the world - from economic mismanagement in Argentina to political instability in Turkey.

Those fears converged last week to start a two-day rout in global markets that was capped by a 318-point drop in the Dow Jones industrial average on Friday. It was the blue-chip index's worst day since last June. The Dow plunged almost 500 points over the two days, finishing down 2 per cent at 15,879 on Friday.

The Standard & Poor's 500 index fell 38 points, or 2.1 per cent, to 1,790. The Nasdaq composite fell 90 points, or 2.2 per cent, to 4,128. Markets in Europe and Asia suffered similar declines and bond prices rose.

The turbulence coincides with a global economic shift: China and other emerging-market economies appear to be running into trouble just as the developed economies of the US and Europe finally show signs of renewed strength.

In a number of developing countries, the adjustment to the slowdown of US Federal Reserve monetary stimulus began to accelerate, as traders dumped local currency in Turkey, South Africa and elsewhere - a rout that touched off concerns of a new crisis brewing in one or more of the world's emerging markets.

Many analysts said a gradual end of Fed asset purchases would be offset by a strengthening US economy, because the Fed would not reduce its monetary stimulus otherwise.

However, the managing director of the International Monetary Fund, Christine Lagarde, speaking at the World Economic Forum in Davos, said it could be a " new risk on the horizon".

"It needs to be really watched," she cautioned, amid concerns that emerging-market economies such as India and Brazil are going to suffer as investors pull out their capital.

Analysts play down the likelihood that China's troubles will touch off global problems akin to those caused by the US system. Its capital markets and banks are not as closely interwoven with the rest of the world, and the Chinese government has trillions of dollars in foreign reserves.

But there is still a fear that the world's second-largest economy is facing financial and demographic constraints that could limit its growth and force a correction to its banking sector. "It is interesting how even a mild tremor in China's growth causes such anxiety around the world," Cornell University trade policy professor Eswar Prasad said.

Additional reporting by The Washington Post, Bloomberg