Wall St dive extends sell-off in Asia markets

[SINGAPORE] The selling which has engulfed emerging markets (EMs) in recent weeks continued yesterday, with stock markets in the region plunging in response to a steep overnight loss on Wall Street. Japan's Nikkei 225 was the worst hit, plunging 610.66 points or 4.2 per cent to a four- month low of 14,008.47, while Hong Kong's Hang Seng Index, which was closed on Monday, lost 637.65 points or 2.9 per cent at 21,397.77.

Here, the Straits Times Index (STI) dropped 25.15 points or 0.9 per cent to 2,965.80, bringing its loss for the year to 202 points or 6.4 per cent. Turnover was a moderately heavy two billion units worth $1.3 billion, of which $807 million or 62 per cent was done in the 30 STI components.

The selling in Japan was led by exporters on concerns that a rising yen would hurt their earnings. The yen has risen from about 104.2 a fortnight ago to 101.35 yesterday, a gain of almost 3 per cent.

US reports said Western markets were rocked on Monday following the release of soft US manufacturing data and after a fresh warning about the federal debt ceiling. The S&P 500 plunged 2.3 per cent and the Dow Jones Industrial Average slid 326 points or 2 per cent to 14,008.47.

The US's ISM (Institute of Supply Management) index, widely used as a gauge of manufacturing activity, suffered a sharp fall from 56.5 in December to 51.3 in January, a level consistent with only modest growth in output, thus casting doubt on the strength of the US recovery.

Meanwhile, US debt and fiscal worries which paralysed the federal government in October and led to its two-week shutdown were revived on Monday, when Treasury Secretary Jack Lew issued an urgent call for Congress to raise the debt ceiling by the end of this month. The yield on the 10-year US Treasury fell to 2.6 per cent, the same level during October's shutdown.

Brokers here were not overly surprised at the selling, given the weak sentiment surrounding EMs since the US Federal Reserve made it clear last September that it would taper its QE monetary stimulus, money which had been instrumental in driving up asset prices in EMs. Since the start of the year, markets and currencies from Brazil, Argentina, Turkey and Asia have all come under pressure, forcing many of their central banks to tighten monetary policy to halt capital flight.

Last week, Turkey's central bank jacked up its benchmark one-week repo rate from 4.5 to 10 per cent in a bid to defend its currency. The move came as India raised rates by 25 basis points to 8 per cent to shore up confidence in the battered rupee, the third hike since September.

A dealer said "the market is bad but we've known for months that the withdrawal of QE money would hurt emerging markets, so we just have to ride this one out".

In its Jan 29 Emerging Markets report, Bank of America-Merrill Lynch said it is still negative on EMs as panic selling has not yet taken grip. "EMs are not oversold - the gap between markets and their 200-day moving average is just 5.6 per cent - we think 10-20 per cent would constitute a proper panic." It added that fund flows still do not show EM capitulation.