Emerging markets selling hits sentiment

Tuesday 10:30 BST. European stocks are in the red as global investor sentiment is hit by more turmoil in emerging market assets.
Industrial commodities are under pressure, illustrating the flight from perceived riskier bets, while demand for "safety" sees highly-rated bond yields nudge down from recent highs.
The FTSE Eurofirst 300 is enduring a loss of 1 per cent after the Asia-Pacific index tumbled 1.7 per cent and as US index futures show the S&P 500 slipping 1 point to 1,645.
That places the Wall Street benchmark at a five-week low. The S&P 500 has lost 3.7 per cent since hitting its record high at the start of August, its decline based partly on some disappointing corporate earnings at the end of the reporting season, but, arguably, mainly the result of uncertainty over the impact of a mooted reduction in Federal Reserve asset purchases.
The prospect of a shift in the Fed's ultra-accommodative strategy has been felt more greatly away from the US, however.
Many investors believe that the Fed's largesse over the years since the financial crisis has seeped into emerging market assets, which were further buoyed by traders' rising risk appetite as developed economy stocks rallied.
Consequently, anticipation that the US central bank may begin to scale back stimulus measures as soon as September is hurting equity markets, bonds and currencies in countries that are most susceptible to capital outflows.
Waning regional economic growth and the recent reversal in the global risk asset rally's momentum has fed into the EM selling.
Of those, particularly hard hit are the nations with large current account deficits, such as India and Indonesia, or which have recently posted disappointing economic data such as Thailand.
Indonesia's stock market led Asia decliners on Tuesday with a 3.2 per cent drop as investors worried about the potential for a balance of payments crisis. The Jakarta Composite has now lost 10.9 per cent in just three trading sessions.
Indonesia's rupiah has hit its weakest versus the dollar since April 2009, and the country's bonds are being sold, at one point pushing 10-year yields towards 8.5 per cent, the most in more than two years.
Similar moves can be seen in other south-east Asian countries - for example Thailand's benchmark stock index is down 2.4 per cent and the baht is near its lowest valuation in just more than a year following Monday's poor GDP reading.
Meanwhile, India continues to see capital flight, the Sensex stock index is off a further 0.5 per cent and the rupee has hit another record trough. India's 10-year borrowing costs moved up close to 9.5 per cent at one stage in the session.
It is noteworthy that Indian yields moved back to 9.1 per cent and Indonesian and Thai stocks closed off their session lows, suggesting the EM frenzy may be calming down a bit.
Still, the early selling extended to the heavyweight developed bourses. Tokyo's Nikkei 225 slumped 2.6 per cent to a seven-week low as exporters feared the economic fallout from the region's woes. Hong Kong's Hang Seng shed 2.2 per cent and the Shanghai Composite was down 0.6 per cent.
Yet all this anxiety is producing its own balm. Sharply raising US interest rates based on expectations of fewer Fed bond purchases are cited as an important cause of recent investor anxiety. But the sight of EM fretting is encouraging funds to seek "haven" Treasuries, pushing 10-year borrowing costs down from the two-year highs reached late on Monday. The current session sees benchmark yields down 6 basis points to 2.82 per cent.
Investors are waiting for further guidance on the course of bond yields from the Fed policy meeting minutes, due for release on Wednesday.
Other central banks also have been in the news. The Aussie dollar is off 0.6 per cent to US$0.9056 after minutes from the Reserve Bank of Australia revealed it had not "close[d] off the possibility of reducing rates further."
The kiwi dollar is losing 1 per cent to US$0.7986, after New Zealand's central bank governor called the exchange rate "over-valued" and announced new restrictions on home lending.
In commodities, the generally sour mood is pushing copper down 0.6 per cent to $3.31 a pound and causing Brent crude to slip 69 cents to $109.21 a barrel.
Moves in major currency crosses are generally dollar negative, leaving the dollar index off 0.3 per cent. Gold is not benefiting from news of buoyant Asian demand, dipping $1 to $1,365 an ounce. More News From Financial TimesAsia-Pacific currencies hit by EM fallout
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