Asian Turmoil Spreads to Exchanges of Latin America
In a dramatic manifestation of economic globalization, the investor assault on Asian markets widened its aim Monday to engulf bourses throughout Latin America, inflicting particularly heavy losses on the Mexican, Brazilian and Argentine stock markets, wiping out most of their healthy gains of the last year.
Most analysts contended, however, that economic fundamentals in Latin America remain basically sound following the painful readjustments of the mid-1990s, suggesting the market downturn may be short-lived.
Hours after markets in Hong Kong resumed a plunge that has triggered a worldwide sell-off, the Mexican stock market suspended trade twice and then shut down for the day after falling 13.3%, its sixth-largest drop ever. The Mexican peso also plummeted nearly 10% against the dollar after two years of comparatively stable exchange rates.
Brazil’s Bovespa index took the worst pounding in the region, falling 15%. It was the steepest one-day decline in five years for the largest of Latin America’s emerging markets. Like many of the Asian markets that have been ravaged in recent weeks, Brazil also has a substantial current-account deficit.
The Argentine Merval index closed 13.7% lower, and the Buenos Aires exchange halted trade on 17 of the 32 shares on the index, in line with a 15% limit on single-day stock movements. Argentine analysts said the government’s exchange rate policy, in which the Argentine peso is pegged to the U.S. dollar, is likely to be tested in coming days.
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Most investment advisors, though, ascribed the market thrashing to the sudden tumble of the Hong Kong market and its impact Monday on Wall Street, rather than to any intrinsic Latin American economic problems. Latin stock markets are highly susceptible to movements of the U.S. markets.
“All the emerging-market countries become guilty by association,” said Jorge Mariscal, head of Latin American equity research at Goldman Sachs.
Even as the market contagion continued its spread around the globe, analysts saw a momentary glimmer of hope in Southeast Asia, the region whose currency devaluations in July were the first in a series of dominoes.
Sluggish trading Monday produced only minor declines in Indonesia, Thailand, Malaysia and Taiwan, while Singapore was up marginally. Results in the Philippines were mixed.
But today was shaping up as another bad one worldwide. In early trading, the Hong Kong market plunged a numbing 14.6%, or 1,529.11 points, to 8,969.09.
And other Asian markets resumed their plunge. New Zealand and Australian stocks--the first to trade each day in the Asia-Pacific region--fell as much as 16%. Markets in Singapore fell 7.5% and South Korea dropped 6.1%. Indonesia’s benchmark index fell 5%. In Tokyo, the Nikkei lost 620.88 points, or 3.6%, in the morning session.
Latin markets are affected by currency devaluations in countries they compete with in trade. As Southeast Asian countries devalued, their products became cheaper in export markets.
“Latin America is reactive, but again, the world is all tied together. This is very vicious,” said Ta-lin Hsu, chairman of H&Q; Asia Pacific, a San Francisco firm managing $600 million in private equity investments in Asia. “The reason is Latin America is still competing with East Asia. With Southeast Asia’s currency dropping like this, it’s going to be difficult for them to compete in some of the world markets.”
The Mexican peso fell from 7.92 to the dollar to 8.65, which meant a depreciation of 69.27 cents, or 9.22%. The peso had traded in the mid-7s to the dollar throughout the year, and a number of economists had described the peso as overvalued, making Mexican exports more expensive. Mexico has experienced three straight months of minor trade deficits as imports have increased and exports have slowed.
In Hong Kong, Monday’s decline was almost 6%, erasing nearly all of Friday’s recovery along with tenuous hopes that the worst was over in the Asian financial capital. The Hang Seng blue-chip index closed down 646.14 points at 10,498.20.
The Hong Kong dollar remained pegged at 7.8 to the U.S. dollar as the government continued to prop up the currency. Analysts estimated that the Hong Kong government spent more than $10 billion last week from its $88 billion in reserve to defend its dollar against speculative attacks.
Though speculators were blamed for trying to force the dollar’s devaluation, triggering last week’s chain reaction that caused investors to stampede out of the Hong Kong market, an increasing number of analysts say the real threat is not from speculators trying to exploit perceived weakness in the dollar, but a lack of confidence from within.
“You can defend the currency against speculators, but not against Hong Kong people if they panic and bail out of the Hong Kong dollar,” said John Seel, an economist and analyst at Bear Stearns. “All the reserves in the world won’t help if the people don’t believe in it.”
At the London Stock Exchange, Europe’s biggest market, the FTSE-100 index dropped 129.50 points, or 2.6%, to close at 4,840.70 after a midafternoon comeback fizzled.
Elsewhere, Frankfurt’s DAX-30 index closed with a loss of 4.2%, while the CAC-40 in Paris finished with a loss of 2.8%.
Tokyo’s benchmark Nikkei-225 average lost 325.38 points, or 1.9%, closing at 17,038.36 points--the lowest in more than two years. The Korea Stock Exchange’s key index was down 3.3%, or 18 points, to a five-year low of 530.47.
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Smith reported from Mexico City and Farley from Hong Kong.
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How Bad Is It?
The U.S. stock market’s dive Monday, while the worst one-day loss in point and percentage terms this decade, erased only part of this year’s stunning gains--after stellar years also in 1995 and 1996 as well. Meanwhile, as money exits stocks, it is pouring into bonds as a “safe haven”--driving market interest rates sharply lower, which could ultimately be good for stocks.
DOW
The Dow’s 7.2% drop Monday took it back to its level in early May, leaving it up 11.1% for the year.
Monday close: 7,161.15, down 554.26 for the day, up 712.88 since Dec. 31.
NASDAQ
The Nasdaq composite index, heavy with battered tech stocks, fell 7% on Monday but is still up 18.9% year-to-date.
Monday close: 1,539.09, down 115.83 for the day, up 244.06 since Dec. 31.
30-YEAR TREASURY BOND
Some investors who are dumping stocks are buying bonds instead--which drove the yield on the 30-year Treasury bond to a 20-month low Monday.
Monday close: 6.12%
Sources: TradeLine, Bloomberg News
How World Markets Fared
Monday’s stock sell-off was not terribly severe in Asia, but it got worse when European markets opened and much worse by the time North and South American markets opened. Key share indexes around the world, in the order of trading hours:
ASIA
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Monday Point Pct. YTD Country (index) close change change % change Singapore (Strait Times) 1,619.90 +2.09 +0.1% -26.9% Malaysia (composite) 693.39 +1.00 +0.1 -44.0 Thailand (SET) 491.01 -2.99 -0.6 -41.0 Japan (Nikkei-225) 17,038.36 -325.38 -1.9 -12.0 Hong Kong (Hang Seng) 10,498.20 -646.14 -5.8 -22.0
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EUROPE
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Monday Point Pct. YTD Country (index) close change change % change Britain (FTSE-100) 4,840.70 -129.50 -2.6% +17.5% France (CAC-40) 2,769.64 -79.39 -2.8 +19.6 Germany (DAX-30) 3,879.12 -171.75 -4.2 +34.3 Spain (IBEX-35) 6,313.86 -290.89 -4.4 +22.5
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UNITED STATES
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Monday Point Pct. YTD Country (index) close change change % change Russell 2,000 420.13 -27.40 -6.1% +15.9% S&P; 500 876.98 -64.66 -6.9 +18.4 Nasdaq composite 1,535.09 -115.83 -7.0 +18.9 Dow industrials 7,161.15 -554.26 -7.2 +11.1
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LATIN AMERICA
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Monday Point Pct. YTD Country (index) close change change % change Mexico (Bolsa) 4,263.89 -656.17 -13.3% +26.9% Argentina (Merval) 678.29 -107.92 -13.7 +4.5 Brazil (Bovespa) 9,816.81 -1,728.50 -15.0 +39.4
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Source: Bloomberg News
