A stockbroker speaks on phone during the Diwali special trading session at the Bombay Stock Exchange in Mumbai
By David Gaffen and Francesco Canepa
NEW YORK/LONDON (Reuters) - A full-scale flight from emerging markets accelerated on Friday, as investors sold shares in major markets and bought safe-haven assets such as U.S. Treasuries, the yen and gold.
On Wall Street, the benchmark S&P 500 stock index tumbled 2.0 percent on the day, and ended the week down 2.6 percent, its worst week since June 2012.
Concerns about slower growth in China, reduced support from U.S. monetary policy and political problems in Turkey, Argentina and Ukraine drove the selling.
The Turkish lira hit a record low as the cost of insuring against a Turkish default rose to an 18-month high. Argentina's peso fell again after the country's central bank abandoned its support of the currency.
The declines mirror moves from last June when developing country stocks fell almost 18 percent over about two months and hit global shares after the Federal Reserve indicated it would soon reduce its bond-buying.
"The world is suffering from the emerging markets' flu," said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles.
The broad nature of the selloff combines country-specific problems with the reality that reduced U.S. Federal Reserve bond buying reduces the liquidity that has in the past boosted higher-yielding emerging markets assets.
The Fed last month pared its monthly purchases of bonds by $10 billion to $75 billion. The U.S. central bank will hold a policy meeting on Tuesday and Wednesday and is widely expected to again pare its stimulus program.
"We expect the emerging market selloff to get worse before it starts getting better," said Lorne Baring, managing director of B Capital Wealth Management in Geneva. "There's definitely contagion spreading and it's crossing over from emerging to developed in terms of sentiment."
Activity was heavy in exchange-traded funds focused on emerging markets. The iShares Morgan Stanley EM ETF was the second-most active issue in New York trading, trailing only the S&P 500's tracking ETF.
An MSCI index of emerging market shares fell as much as 1.6 percent. Since mid-October, the index has lost more than 9.0 percent. The MSCI all-country world equity index was down 2.3 percent for the week, its worst since June.
Funds have continued to flee emerging market equities. In the week ended January 22, data from Thomson Reuters Lipper service showed outflows from U.S.-domiciled emerging market equity funds of $422.41 million, the sixth week of outflows out of the last seven.
Emerging market debt funds saw a 32nd week of outflows out of the last 35, with $200 million in net redemptions from the 250 funds tracked by Lipper.
"It's just the final realization that they can't continue to grow as an economy the same way they did before," said Andres Garcia-Amaya, global market strategist at J.P. Morgan Funds in New York. "It's a combination of less liquidity for these countries that depended on foreign money and China kind of throwing some curve balls as well."
U.S. stocks sank, with the Dow Jones industrial average ending down 318.24 points, or 1.96 percent, at 15,879.11. The Standard & Poor's 500 Index was down 38.17 points, or 2.09 percent, at 1,790.29. The Nasdaq Composite Index was down 90.70 points, or 2.15 percent, at 4,128.17.
In a signal that the selling of stocks may be overextended, investors were willing to pay more for protection against a drop in the S&P 500 on Friday than for three months down the road. The last time the spread between the CBOE volatility index and three-month VIX futures turned negative was in mid- October, shortly after a 4.8 percent pullback in the S&P 500 opened the door to the last leg of the 2013 market rally.
European shares suffered their biggest fall in seven months. The FTSEurofirst 300 index of top European shares closed down 2.4 percent at 1,301.34 points. The index has now erased all its gains for 2014, and is down 1.1 percent on the year.
Spain's IBEX index, highly exposed to Latin America, was the worst-hit in Europe, falling 3.69 percent.
The dollar index was flat, a day after falling 0.9 percent against a basket of major currencies, including the euro, yen, Swiss franc and sterling. That was its worst one-day performance in three months.
A flight to safety lifted currencies backed by a current account surplus, such as the Japanese yen and Swiss franc, and highly rated government bonds. German Bund futures rose and 10-year U.S. Treasury yields hit an eight-week low below 2.75 percent.
Gold hit a two month high, gaining for a fifth straight week, as weaker equities burnished its safe-haven appeal. Spot gold rose to as high as $1,272.70 from $1263.95 on Thursday.
(Reporting by Barani Krishnan; Additional reporting by Dan Bases and Toni Vorobyova; Editing by Nigel Stephenson, Nick Zieminski, Leslie Adler and Meredith Mazzilli)