Global Sell-off Shows Fed Reach Beyond the U.S.

In the weeks since the Fed’s chairman, Ben S. Bernanke, first indicated that the central bank might start to pare back its support for the economy, markets in Asia, Europe and Latin America have fallen even more sharply than those in the United States, threatening economic growth in many countries.

While leading market measures in the United States have declined 4 percent over the last month, an index of the world’s stock markets has slumped more than 6 percent.

“The Fed isn’t just the U.S.’s central bank. It’s the world’s central bank,” said Mark Frey, the chief strategist at the Cambridge Mercantile Group.

The selling picked up in markets around the world on Thursday, a day after Mr. Bernanke’s latest comments on the Fed’s plan to wind down the stimulus. While the reason for the shift by the Fed is good — a strengthening of the recovery in the United States — investors are nervous that the global economy may not be ready.

The prospect of slowing economic growth and rising interest rates set off waves of volatile selling on markets around the world. In the United States, the benchmark Standard Poor’s 500-stock index fell 2.5 percent on Thursday, its steepest one-day decline since November 2011. Treasury prices also slumped, driving yields, which move in the opposite direction, to touch their highest levels in nearly two years.

The yield on the 10-year Treasury — a benchmark for mortgages and other consumer rates — rose as high as 2.47 percent before settling at 2.42 percent. Gold, once a favorite of investors, slid to two-and-a-half-year lows.

The damage was more pronounced in a wide array of markets outside the United States, like Philippine government bonds and the Norwegian currency. Stock indexes in China, Europe and Mexico fell more than 3 percent.

Investors were also rattled by reports that Chinese banks had become reluctant to lend to one another. And Europe’s debt woes came into focus again after the International Monetary Fund said it was considering suspending aid to Greece. But traders and investors cited the Fed’s changing policies as the main driver behind the big flows of money around the world.

“The trigger was clearly what is going on with the Fed,” said Ashish Goyal, the investment director at Eastspring Investments in Singapore.

The heavy selling is a sharp reversal after years when low interest rates in the United States encouraged investors to put their money into foreign countries. For investors in once-attractive foreign markets, the fear is that those markets may be on even less firm economic footing than the United States’, and consequently less able to absorb the decline in lending that comes along with rising interest rates.

“When the U.S. embarks upon policies that are appropriate for its own domestic circumstances, it can impose policies on the rest of the world that aren’t necessarily appropriate to them,” said Darren Williams, the senior European economist at AllianceBernstein in London.

Interest rates are a vital determinant and indicator of economic activity. To try to encourage borrowing and bolster the economy after the financial crisis, the Fed has pushed rates down by cutting the interest rates it offers banks and by buying more than $2 trillion of bonds. The extent of the intervention has put markets on a hair trigger for any hint of a change from the Fed.

Mr. Bernanke has indicated that the Fed will pare its bond purchases only very slowly and may increase them again if there are signs the economy is being hurt. That has some analysts calling this week’s market turmoil a panicked overreaction. For the year, the S. P. 500 index is still up 11.4 percent.

But there are significant concerns that the Fed may not be able to control the convulsions in the markets that Mr. Bernanke has already set off with his comments.

“It’s a very significant moment,” said Sebastian Galy, a foreign exchange strategist at Société Générale. “It’s the end of an extremely aggressive phase of monetary policy globally.”

Peter Eavis contributed reporting.

Article source: http://www.nytimes.com/2013/06/21/business/economy/global-sell-off-shows-fed-reach-beyond-the-us.html?partner=rss&emc=rss