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Economic shifts send stocks plummeting

by NATHANIEL POPPER New York Times News Service on January 25, 2014 10:39 AM

The ascent of developing countries over the last decade has been fueled by two global trends: the steady rise of China and the willingness of the Federal Reserve to stimulate the economy.

Now, with both trends starting to retreat, investors have been heading for the exits in markets as far removed as Buenos Aires, Istanbul and Beijing, with effects spilling over into the rest of the world.

A decline this week picked up speed and spread around the globe on Friday, leading to the first sustained drop in United States stock indexes in 2014. The Standard & Poor’s 500-stock index fell 2.1 percent on Friday, to end its worst week since June 2012. It was the first serious break in a long rally that took the broad U.S. stock market up nearly 30 percent last year.

But the damage is expected to be worse in places that have relied on demand for raw resources in China, whose economic advance is slowing.

An index of Chinese manufacturing growth released on Thursday showed that the most important cog in the country’s economy, the world’s second-largest, was contracting for the first time in six months.

The damage has been particularly severe in countries that are already suffering from political instability, like Turkey and Argentina.

Turkey’s currency fell to a record low against the dollar on Friday, a drop that will hit the purchasing power of everyone in the country.

On a street corner in Istanbul, Yilmaz Gok, 51, said, “I’m a retiree making ends meet on a small pension and all I care about is a possible increase in prices.”

“I will need to cut further,” he said. “Maybe I should use my natural gas heater less.”

The concerns about developing economies are being heightened by the Fed’s recent decision to begin pulling back on the bond-buying stimulus programs that have helped keep interest rates low around the world. Now, many countries that had come to rely on those low rates could face a surge in borrowing costs and a period of painful readjustment. Many emerging countries could also be hurt if investors choose to pull their money to chase returns in the recovering economies in the U.S. and Europe.

“A lot of these currencies are getting trashed and people’s standards of living are going down,” said Michael Purves, the chief global strategist at Weeden & Co. “There is a potential for social unrest to accelerate.”

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