Bernanke Speaks, and Emerging Markets Take a Hit

Markets the world over have wobbled since Federal Reserve Chairman Ben Bernanke acknowledged to Congress on May 22 that the central bank might slow down its stimulus program. No area has been hit quite like emerging markets. Seven of the 10 worst-performing stock markets since Bernanke’s testimony are based in developing countries. Brazil’s Ibovespa index has lost the most, down 21.6 percent as of June 19, and benchmarks from the Philippines to Greece have posted double-digit declines. The JPMorgan Emerging Markets Bond Index lost 7.4 percent in a little more than a month. Currencies from South Africa’s rand to India’s rupee have hit lows against the dollar. “It’s been a pretty broad beating across the board,” says Paul Christopher, chief international strategist at Wells Fargo Advisors. “The Fed opened Pandora’s box.”

Bernanke’s words came as a blow in part because the Fed had been feeding the emerging-markets frenzy. By keeping American interest rates near record lows, Bernanke’s stimulus policies have reduced the returns on safe assets such as Treasuries and encouraged professional traders to scour the globe for riskier, and potentially more lucrative, assets. His comments reminded those investors that the Fed’s easy money policies won’t last forever. On June 19, Bernanke said the Fed may start reducing bond purchases later this year if the economy improves.