APBy Richard Hubbard
LONDON — The U.S. Federal Reserve’s explicit signal it will stop pumping money into the world economy and data showing China’s economy slowing down swept across financial markets Thursday, sinking bonds, shares and commodities alike.
Emerging markets, many of which have been primed by easy Fed money, saw some of the biggest selling as investors rushed to the exits.
MSCI’s benchmark index for emerging equities slumped by more than 3 percent and shares across the Asian Pacific region outside Japan recorded their biggest one day drop since late 2011.
World stocks in general were down 1.75 percent.
The initial catalyst for the selloff was Fed Chairman Ben Bernanke’s surprisingly strong commitment to end the central bank’s to asset-buying by the middle of 2014. That sent 10-year U.S. Treasury note yields to 15-month highs.
“Bernanke came across as being quite clear and I think people were hoping for a less clear cut path to higher rates and that came as a little bit of shock,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole.
Fed stimulus has helped keep the world awash in investment cash as it has struggled with a severe economic downturn.
The withdrawal of such money makes the future direction of financial markets uncertain, although it is motivated by expectations of a more robust U.S. economy.
“We see [Bernanke’s statement] as a good sign in the long-term as it shows that a return to normal monetary policy is in the offing, that economic growth is picking,” said James Humphreys, senior investment manager at Duncan Lawrie Private Bank.
Thursday’s market reaction for many, however, was to run for the hills.
The jump in Treasury yields lifted the dollar against a broad range of currencies by 0.6 percent. Against the yen, the dollar gained around 1.8 percent to 98.18 yen.
The shift into U.S. assets then accelerated when a survey of China’s factories showed activity slumping to a nine-month low just as a squeeze in the nation’s money markets sent short term rates to record highs.
The stress was clear in Asian credit markets, where the spread on the iTraxx Asia ex-Japan investment-grade index widened 23 basis points, reflecting the rising cost of hedging against debt default.
In the currency market, the Philippine peso lost 1.2 percent to 43.76 per dollar, the weakest since May 31 last year, while South Korea’s won fell 1.4 percent to 1,146.6.
India’s rupee hit an all-time low on the U.S. dollar, prompting intervention to stem the rot.
“If you put the Chinese numbers together with the policy statements from both, what’s clear to me is that the emerging market currencies, particularly with a commodity bias, will continue to go down,” said Mark Matthews, head of Asia research at Julius Baer.
In Europe a key survey of business activity from the 17 countries that use the euro helped offset some of the gloom by suggesting the bloc’s long-running recession was finally beginning to ease.
The broad FTSEurofirst 300 index, which only last month hit a 5½ year high, was still down by 1.75 percent by mid-morning though off its lows. The euro zone’s blue-chip Euro Stoxx 50 index fell 2 percent.
Markit’s Flash Eurozone Composite Purchasing Managers’ Index, which is seen as a reliable economic growth indicator for the bloc, rose to 48.9 in June from May’s 47.7, topping forecasts and leaving it at its highest level since last March.
“At this rate we should see stabilization in the third quarter and growth appearing in the fourth,” said Chris Williamson, chief economist at Markit.
The most encouraging picture was in southern Europe where countries such as Spain and Italy saw the smallest declines in two years.
The euro eased 0.5 percent at $1.3223, swiftly retreating from a four-month high around $1.3418 touched on Wednesday.
Oil slipped by around $2 for its biggest daily slide in close to three weeks while gold fell for a fourth straight session to $1,328.75 an ounce — its lowest level since a 15 percent plunge in mid-April.