FTSE suffers as emerging market worries prompt investors to take fright

Plans by Turkey’s central bank to take action reversed a fall in the value of lira. Photograph: Murad Sezer/Reuters

Shares in London fell sharply for a second successive session on Monday as the world's investors took fright at fears of a meltdown in emerging market economies.

The FTSE 100 closed 113 points lower at 6550 despite attempts by governments in Argentina and Turkey to prevent further sell-offs. Investors sought the safe havens of the Swiss franc and the Japanese yen, dumping assets in emerging markets deemed to be vulnerable.

Turkey's central bank will hold an emergency meeting on Tuesday amid speculation that it will raise interest rates by 2.25 percentage points to 10%. The move reversed a fall in the lira and led to a tentative rally in share prices.

The Argentine government set monthly limits on purchases of US dollars in an attempt to halt currency flight, but this did not prevent shares falling almost 4% in morning trading.

Despite the volatile mood, the Federal Reserve – America's central bank - is still expected to go ahead with the planned tapering of its stimulus to the US economy when it concludes a two-day meeting on Wednesday.

Emerging markets were hit hard last spring when the outgoing chairman of the Fed, Ben Bernanke, first floated the idea of scaling back the $85bn (£51bn) of monthly asset purchases designed to boost credit growth in the world's biggest economy. Tapering began in December, with asset purchases reduced to $75bn a month, and a further $10bn reduction is expected at Bernanke's last meeting unless Wall Street plunges in the next 48 hours.

Alastair Winter, chief economist at Daniel Stewart, said: "There is no doubt that many investors will be hoping that the next $10bn monthly tranche of the taper will be delayed ... but they are almost certain to be disappointed."

Mike Ingram of BGC Partners said investors had finally woken up to the structural problems in emerging markets, saying: "Most stock marketsare now in the red for the year, and still heading south.

"Indeed, it's grimly impressive just how broad the market fallout has been. In addition to the collateral damage inflicted on equity markets, core bond markets have rallied convincingly; credit default swap spreads have risen across the board and even side-lined gold has managed a $20 pop. Volatility is up, as are traded volumes and overall this looks to be the first true 'risk off' episode markets have suffered since last summer's taper-inspired rout.

"The market seems to have been truly taken by surprise, despite being given a rude reminder just eight months ago that all was not well with emerging markets."

Ingram said the problems included political instability in Egypt, corruption in Russia); current account vulnerability in India; commodity exposure in Brazil; and the discredited central bank in Turkey.