London - A sharp sell-off in emerging market accelerated on Friday, setting global stocks on track for their worst week this year, on worries over an economic slowdown in China, US monetary policy and domestic political issues from Turkey to Argentina.
Investors fled markets in Asia and Latin America, fearing the impact of slower growth in China, as highlighted by a weak factory activity report on Thursday, and expectations the Federal Reserve will cut further its bond-buying stimulus at a policy meeting next week.
A flight to safety lifted currencies backed by a current account surplus, such as the Japanese yen, and highly rated government bonds, pushing up German Bund futures and sending 10-year US Treasury yields to an eight-week low.
In the last week, investors withdrew some $2.5 billion from emerging stocks. Investments in Latin American alone dropped by $398 million, or 1 percent, analysts said, citing EPFR data.
“I think you've got a bit further to go in terms of outflows from emerging markets,” Mark Tinker, head of AXA Framlington Asia, said.
A decline in the flash Markit/HSBC Purchasing Managers' Index for China, the world's second-largest economy, reinforced concerns about global growth, especially in commodity-sensitive emerging markets.
On top of that, the Fed is expected to continue to dial back its bond buying when it meets next week after US jobless claims data suggested further improvement in the labour market - heaping more pressure on emerging currencies.
European shares tracked global stocks lower, with emerging-markets exposed stocks among the worst hit.
The Spanish IBEX, which has high exposure to Latin America, lagged the other regional bourses, down 1.8 percent.
Asian shares had hit a 4-1/2 month low and MSCI's broadest index of Asia-Pacific shares outside Japan dropped 1.1 percent, adding to the previous session's 1.3 percent decline following the Chinese factory activity report.
The broader MSCI world equity index, which tracks shares in 45 countries, was down 0.3 percent at 1,645.09 points, taking its losses for the week to 0.7 percent.
Emerging currencies were battered overnight, with Argentina's peso suffering its steepest daily decline since the country's 2002 financial crisis, as the central bank gave up its fight against the unit's decline.
The Turkish lira TRY= hit a new record low against the dollar, even after the central bank spent at least $2 billion trying to prop it up on Thursday.
The Indian rupee and the Indonesian rupiah hit two-week lows against the dollar, though both steadied in European trading.
The Aussie dollar fell to a 3-1/2 year low of $0.8681 after Reserve Bank of Australia board member Heather Ridout was reported saying the Aussie had not fallen enough.
As the yen strengthened against the dollar, Japan's Nikkei stumbled 1.9 percent to a one-month closing low in relatively active, extending Thursday's 0.8 percent drop.
“Sentiment was already poor because of the poor US jobs data released early this month, and it was exacerbated by the Chinese figures,” said Naoki Kamiyama, head of Japan equity strategy at Bank Of America Merrill Lynch in Tokyo.
The US dollar steadied after slipping 0.9 percent against a basket of major currencies, including the euro, yen, Swiss franc and sterling, on Thursday. That was its worst one-day performance in three months.
“When investors avoid risk, they buy currencies backed by a current account surplus,” said Sho Aoyama, senior market analyst at Mizuho Securities in Tokyo. Data published on Thursday showed the euro zone current account surplus hit a record high in November.
US stock futures suggested a sell-off on Wall Street was likely to continue on Friday, with March contracts on the S&P 500 down 0.3 percent.
On Thursday, the Standard & Poor's 500 fell 0.9 percent and the Dow Jones industrial average 1.1 percent to record its third consecutive day of losses.
As investors cut their positions in risky assets, safe-haven gold and highly-rated government bonds were in demand.
The Bund future was last 36 ticks up at 142.40 compared with 142.04 at Thursday's close.
Gold was trading close its highest in seven weeks, poised for a fifth straight weekly climb as weaker equities burnished its safe-haven appeal. - Reuters