Markets start the fight back

By Hugo Duncan SHARES around the world steadied yesterday after a bout of heavy selling, as central banks in the emerging markets launched a fight back to prop up their troubled economies.

Global stock markets have plunged in recent days – the FTSE 100 index lost nearly 300 points in a week – amid jitters over the Federal Reserve’s plans to reduce support for the US economy.

Slowing growth in China and turmoil in countries including Turkey and Argentina have also spooked investors with much of fallout hitting currencies in the emerging markets.

The Turkish lira, Argentinian peso, Indian rupee and Russian rouble have all taken a hammering in recent days – stoking fears that a full-blown crisis is on the way.

Analysts at Morgan Stanley said ‘The Fragile Five’ countries of Indonesia, South Africa, Brazil, Turkey and India are most at risk when the Fed tapering really kicks in.

Dominic Rossi, chief investment officer at fund manager Fidelity, y, said: ‘ We’ve seen this movie ie before.

‘ One emerging country after er another gets left stranded on the he shore as the tide goes out.

‘The weakest ones first, Argen-tina and Turkey, soon to be folllowed by Brazil, Russia and d others.’

The Reserve Bank of India yes-terday raised its benchmark inter-est rate from 7.75pc to 8pc in a bid id to cool inflation.

The rupee recovered some of its ts lost ground as the central bank nk said another rate hike will follow if inflation does not fall to a more re reasonable level.

The Turkish lira also strengthened as investors speculated that its central bank would reverse course and push through a dramatic rate hike overnight.

Stock markets recovered – the FTSE 100 index edged 21.67 points higher to 6572.33 in London – on hopes that central banks are finally getting a grip on the situation.

Investors poured cash into emerging markets as moves by the Fed, the European Central Bank and the Bank of England to slash interest rates in the West hit returns returns.

But the money is now being pulled back out again as the prospect of higher rates emerges, particularly in the US and the UK.

The Fed has already started to ‘taper’ its mammoth programme of quantitative easing, reducing its support for the US economy from $85bn a month to $75bn a month.

The world’s most powerful central bank is widely expected to announce another $ 10bn cut tonight despite the turmoil in the emerging markets. Jessica Hinds, an economist at Capital Economics, said: ‘The recent market turbulence has fuelled some speculation that the Fed will hold back from announcing a further reduction in its monthly asset purchases.

‘However, we expect the US central bank to trim its purchases by another $10bn.’

Analysts and investors are nervous about the fallout, however, as the currencies of countries with the biggest economic and political problems – notably Argentina and Turkey – diving. ‘By the standards of emerging market crises, we do not expect this to be a particularly bad one,’ said Holger Schmieding, chief economist at Berenberg Bank in London.

But Benoit Anne, head of emerging markets strategy at Societe Generale, said: ‘We are in full-blown financial contagion mode.

‘There is no point spending too much time trying to pick and choose when faced with a severe market crisis like the one we are witnessing.

‘Right now, sell everything.’