Investors braced for emerging markets chaos

INVESTORS are bracing themselves for yet another day of volatility in the financial markets, as political problems in Argentina, Turkey and Ukraine, concerns about slower growth in China and reduced support from US monetary policy spook traders.

A full-scale flight from emerging markets accelerated last Friday as shares in major economies were dumped in favour of safe-haven assets such as US Treasuries, the yen and gold. And the trend looks set to continue today after Argentina’s central bank decided over the weekend to relax strict foreign exchange controls, pulling the rug out from under the country’s plummeting currency.

The exchange rate suffered its steepest daily decline since the country’s 2002 financial crisis last Thursday, pushing the government to scale back its support. The bank’s move will cut the tax rate on buying dollars from 35 to 20 per cent and allow citizens to save more of their income in the US currency.

Meanwhile the Turkish lira has fallen 10 per cent against the US dollar over the past month, touching a new record low on Friday, and ongoing political clashes in Ukraine have driven investors further from riskier investments. All eyes are now on a meeting of the US central bank tomorrow and Wednesday, where the Fed is widely expected to further pare its stimulus programme.

“We expect the emerging market selloff to get worse before it starts getting better,” said Lorne Baring of B Capital Wealth Management.

“There’s definitely contagion spreading and it’s crossing over from emerging to developed in terms of sentiment.”

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