By Herbert Lash
NEW YORK (Reuters) - Global equity markets fell on Wednesday and emerging market currencies slumped on worries that aggressive interest rates hikes by Turkey and South Africa will not be enough to prop up developing markets, and as an upcoming policy decision by the U.S. Federal Reserve added to investors' jitters.
The Turkish lira and South African rand fell following a short-lived rally after Turkey's massive 425 basis point rate hike overnight initially stirred hopes of breaking a sharp sell-off in emerging markets and reviving risk appetite.
The lira gave back almost two-thirds of an earlier 3 percent surge, stocks in Istanbul buckled and South Africa's rand fell even after the country's central bank raised interest rates.
Gold rose as stocks in Europe sank to six-week lows and Wall Street stocks fell as many analysts said the sell-off brought U.S. stocks down to more reasonable valuations.
"Risks are coming back into focus at multiple levels, and people are re-pricing in what at this point is a healthy development," said Brad McMillan, chief investment officer at Commonwealth Financial in Waltham, Massachusetts.
More From This Section
"This so far is under a 4 percent drawdown, which in more normal times has been completely normal," McMillan said.
Major European indexes shed more than 1 percent at one point but a measure of global equity markets. MSCI's all-country index, fell only 0.15 percent.
But MSCI's emerging markets index rose 0.37 percent, buoyed by gains in Hong Kong's Hang Seng index and mainland China markets earlier in the session, and a rebound in Mexico's stock market.
Investors were also worried that the Fed at the close of its policy meeting on Wednesday afternoon could announce another trimming of U.S. monetary stimulus, something that may exacerbate the emerging markets rout.
The turmoil in emerging markets and recent disappointing U.S. job growth are unlikely to deter the Fed from trimming its bond-buying stimulus, analysts say, as Ben Bernanke wraps up his last policy meeting at the helm of the U.S. central bank.
While a wild card, "the Fed has repeatedly said that these emerging markets have to rebalance their own economic growth, they can't rely on the Fed to do that," said David Lafferty, chief market strategist at Natixis Global Asset Management in Boston, which oversaw $838.2 billion in assets as of September 30.
"I don't think that these brush fires in Turkey, Argentina and Ukraine have been enough to sway the Fed off their current pace," Lafferty said. "A continued tapering of an additional $10 billion is probably what's baked in."
Removal of the Fed's bond-buying has been a major factor in the emerging markets' sell-off because the program has increased liquidity, and part of that money has flowed to the higher-yielding assets in emerging markets.
The Fed in December decided to pare its monthly purchases of Treasuries and mortgage-backed securities, designed to drive down long-term borrowing rates, by $10 billion to $75 billion.
If the Fed reduces its quantitative easing program by another $10 billion, that would likely put further pressure on emerging markets currencies, said Nick Xanders, head of European equity strategy at BTIG in London.
The Fed will issue its policy statement at 2 p.m. (1900 GMT) Wednesday.
The Dow Jones industrial average fell 131.77 points, or 0.83 percent, to 15,796.79. The S&P 500 lost 10.56 points, or 0.59 percent, to 1,781.94 and the Nasdaq Composite dropped 23.073 points, or 0.56 percent, to 4,074.889.
In Europe, the pan-regional FTSEurofirst 300 index closed down 0.63 percent at 1,289.94. The EuroSTOXX 50 fell 0.89 percent at 3,011.45 points.
Brent crude oil traded above $107 a barrel as investors waited to hear the Fed's decision, with prices supported as concerns of turmoil in emerging economies eased.
Brent rose 41 cents to $107.82 a barrel. U.S. oil was down 38 cents to $97.03.
Gold for February delivery rose 0.88 percent to $1,261.80 an ounce.
The dollar weakened against the yen and Swiss franc as traders reckoned emergency action taken to stabilize Turkish markets would not be enough to calm jitters over global emerging markets.
The dollar turned 0.82 percent lower at 102.11 yen, holding above the seven-week low set on Monday. The dollar edged down 0.29 percent against the Swiss franc at 0.8945 franc.
U.S. government bond prices rose, with the 10-year note 11/32 in price to yield 2.7059 percent.
Bund futures rose 44 ticks to settle at 142.90 euros.
For graphics on Turkey interest rates, click https://bsmedia.business-standard.comlink.reuters.com/jez79t
For graphics on EM currencies performance, click http://link.reuters.com/xyd46v
(Reporting by Herbert Lash; Additional reporting by Marc Jones in London; Editing by Leslie Adler)