TOPICS > Economy

Global markets suffer major drop

January 25, 2014 at 10:42 PM EDT
Hari Sreenivasan speaks with Sudeep Reddy of the Wall Street Journal about what the recent drop means for the global economy and how it may affect emerging markets.

HARI SREENIVASAN: We wanted to spend some time this evening talking about the global market. Following a huge runup in stock prices during the past year, most major markets reversed course late this week and suffered their biggest decline since 2012. For more about what contributed to that reversal we are joined now from Washington by Sudeep Reddy of the Wall Street Journal. So, help us to unpack what happened in the stock market the past couple of days. What contributed to this?

SUDEEP REDDY: Well, investors are reacting to a whole set of global forces that are all colliding at once. In the United States, the Federal Reserve is starting to pull back on it’s extreme monetary policy that is pushing interest rates up, and that is a very difficult adjustment for a number of emerging economies that have seen a flood of money come into their markets as a result of low interest rates around the world. So, in Turkey, for instance, they are going through a fair amount of political instability, and combined with the move by the Fed., investors are starting to flee and nobody wants to be left there holding an investment that is going to turn bad very quickly. You are seeing similar stories in South Africa, in Brazil, even Argentina, which has been a bit of an economic mess, and investors in the United States are looking at this and wondering whether global growth is going to hold up, whether the entire global economy is going to be propelled by some of the forces that have been propelling it for the past five years.

HARI SREENIVASAN: Ok. There is also a manufacturing report in China. Why is that so significant?

SUDEEP REDDY: That was significant, of course, because China is the second largest economy in the world, and there have been longstanding fears as to what will happen as China tries to rebalance its economy. It is trying to shift from being a big exporter to providing more of its economic growth from home, from its own citizens, and as it does that it is starting to do this big adjustment and there are other problems in China, like a big property bubble, that needs to be deflated. Its leadership knows it needs to deflate. China has been a growth engine for the world, and that starts to pull back, it makes developed economies very nervous, because the United States and Europe are selling into China now and not just buying products from it.

HARI SREENIVASAN: So, besides the decision by the Fed. to raise interest rates here and the Chinese manufacturing, what has been happening to the Argentinean currency or the Turkish currency to devalue so quickly against the dollar?

SUDEEP REDDY: Well, you are seeing a reversal amongst investors in Argentina – because they have has so many problems since it’s currency crisis in 2001 and 2002, investors are not really giving them the benefit of the doubt at all, and fleeing very quickly. Turkey has its own issues, and people are pulling out of there. The big question now is whether these risks are dealt with as emerging markets as a whole, and investors treat them all alike, or whether they start to distinguish between other economies. Mexico, for instance, is an emerging economy that would have been wrecked by something like this before, but it is in a much better position now, and so we are going to have to watch over the next coming weeks whether investors can handle understanding some of the difference between some of these economies.

HARI SREENIVASAN: So, is what happened yesterday just a short-term reaction? So, to put that in perspective it is only a two percent drop compared to a 30 percent sort of positive year.

SUDEEP REDDY: It is a very short-term reaction. We can’t get ahead of thinking this is going to be a long slide down. It is certainly possible that this could be the beginning of a currency crisis, but we have gone through movements like this before, and gotten past them fairly easily, but there have been a lot of forces building up and it’s not really clear to investors how something like this settles out. These are a lot of forces that you haven’t actually seen come together like this before, certainly from the Fed., and what you are seeing in China, and a number of these bigger emerging markets. It’s an unusual adjustment for investors and for most markets, so so we need to watch whether this ricochets through other markets, or whether we start to see investors get a little calmer and not overreact to some of these moves.

HARI SREENIVASAN: Alright, Sudeep Reddy from the Wall Street Journal, joining us from Washington. Thanks so much.