Fear is back in the market.Investors are worried about slower economic growth in China, a gloomier outlook for U.S. corporate profits and an end to easy money policies in the United States and Europe. They're also fretting over country-specific troubles around the world - from economic mismanagement in Argentina to political instability in Turkey.
Those fears converged to start a two-day rout in global markets this week, capped by a 318-point drop in the Dow Jones industrial average Friday.
Investors dropped risky stock and currency investments in the developing world and sought refuge in safer ones like bonds, gold and Japanese yen.
The Dow has fallen every day this week, leaving it down 3 percent. That decline is the Dow's worst weekly performance since mid-May 2012. Meanwhile, the S&P 500 is down 2.4 percent since last Friday. That's the index's worst weekly slide since early November 2012.
In Asia, the pain was keenest in Japan Friday, as demand for a safe-haven currency - the yen - surged, dampening prospects for the export-driven Japanese economy. The Nikkei 225 slipped 1.9 percent to close at 15,391.56.
Elsewhere in Asia, Hong Kong's Hang Seng shed 1.2 percent to 22,450.06 and Seoul's Kospi dropped 0.4 percent to 1,940.56. Shares in Australia, New Zealand, Singapore, Malaysia, Indonesia and the Philippines sagged.
The turbulence coincides with a global economic shift: China and other emerging market economies appear to be running into trouble just as the developed economies of the United States and Europe finally show signs of renewed strength nearly five years after the end of the Great Recession.
The trouble began Thursday after a survey showed a drop in Chinese manufacturing activity this month. Days earlier, China reported that its economic growth last year matched 2012 for the slowest pace since 1999.
"It is interesting how even a mild tremor in China's growth causes such anxiety around the world," said Eswar Prasad, professor of trade policy at Cornell University.
Slower growth in China is bad news for countries that supply oil, iron ore and other raw materials to the world's second-biggest economy. Some of those countries, such as Indonesia and South Africa, were already struggling with an outflow of capital as rising U.S. interest rates drew investors to the United States.
Here's a look at the forces buffeting global financial markets:
Stocks are falling hard despite a decent earnings reporting season - at least on the surface.
About two-thirds of S&P 500 companies that have reported earnings for the last quarter have beaten analysts' estimates, according to S&P Capital IQ. That is in line with the historical average. For all S&P 500 companies, analysts expect earnings per share to rise 5.6 percent from a year earlier - a respectable jump.
But that forecast for growth is about half what analysts were expecting as recently as this summer. And analysts have gotten more pessimistic about the current quarter, too. They expect less than 4 percent growth in S&P 500 earnings per share now, down from an October forecast of more than 7 percent.
THE END OF EASY MONEY
Since the global financial crisis hit in 2008, the Federal Reserve has flooded markets with cash to push interest rates lower and encourage U.S. businesses and consumers to borrow and spend. But last month, as signs of growing economic strength emerged in the U.S., the Fed cut back - reducing its monthly bond purchases to $75 billion from $85 billion. It also said that it expected to reduce the bond-buying further "in measured steps" at upcoming meetings.
The Fed meets again next Tuesday and Wednesday. Many economists expect the central bank to cut the purchases again - perhaps to $65 billion a month.
The scaling back of the Fed's easy money policies has hit some emerging markets hard. When the Fed was pushing U.S. rates lower, emerging markets had seen an inflow of capital from investors seeking higher returns than they could get in the United States. Now investment is flowing back to America, hammering currencies in emerging markets.
The South African rand, Russian ruble, Turkish lira, and especially the Argentinian peso - which fell 13 percent Thursday - have been "trounced," said Jane Foley, a currency strategist at Rabobank. "Talk that the U.S. Federal Reserve will announce another reduction in its monthly bond purchases next week ... (is also) contributing to a loss of confidence in some emerging markets," she said.
In some countries, concerns over the local political or financial situation have worsened the market volatility dramatically. That was most obvious in Argentina, where the peso this week suffered its sharpest fall since the country's 2002 economic collapse. The government, running short of reserves it could use to buy the currency and keep it from falling, has let the peso drop instead. The country's economic fundamentals are grim: Inflation is believed to be running at about 25 percent to 30 percent.
The peso fell 16 percent in two days, easily the worst performer among emerging markets.
Turkey's national currency, the lira, hit multiple record lows in recent weeks as investors worried about the fallout of a corruption scandal that threatens to destabilize the government. Having a stable government for the past 10 years has been one of the key ingredients in the country's economic revival.
The lira hit an all-time low of 2.33 against the dollar on Friday - from around 2 per dollar in December - despite a $3 billion-intervention by the central bank in foreign exchange markets.
Beyond political problems, the countries that have seen their currencies fall most are those that rely heavily on exports of raw materials used in manufacturing. The Russian ruble was trading at 34.58 per dollar, from below 34 on Thursday. The South African rand weakened to 11.13 per dollar, from 10.98 the day before.
CHINA AND GLOBAL GROWTH
Since the recession, the global economy has relied heavily on China and other emerging markets as the developed economies of the United States, Europe and Japan struggled.
But China's economy is decelerating. It grew 7.7 percent in October-December 2013 from a year earlier, down from the previous quarter's 7.8 percent growth. Factory output, exports and investment all weakened. On Thursday, the preliminary version of HSBC's purchasing managers' index of Chinese manufacturing fell to 49.6, the lowest reading since July's 47.7. Anything below 50 signals a contraction.
China's growth is still is far stronger than the United States, Japan or Europe, but is down from the double-digit rates of the previous decade.
Many economists are troubled less by the slower growth numbers than by China's over-reliance on trade and investment instead of spending by its consumers.
"China, and the world at large, would benefit from its shift to a lower but more sustainable pattern of growth that is not so heavily dependent on investment-led growth fueled by bank credit," Cornell's Prasad said.
China's growth is slowing just as the world's rich economies begin to gain momentum.
The 17 countries that use the euro currency appear to be recovering from a debt crisis that tipped them into a double-dip recession in late 2011.
In the United States, households have reduced crippling debt levels and are in better shape to start spending again. The International Monetary Fund expects the U.S. economy to grow 2.8 percent this year, up from 1.9 percent in 2013, and for the eurozone economy to grow 1 percent in 2014 after contracting 0.4 percent in 2013 and 0.7 percent in 2012.
Adolfo Laurenti, an economist at Mesirow Financial, expects the United States, Britain, Germany and Japan to drive global economic growth this year.
The "emerging economies that contributed most to global growth during the years following the Great Recession are expected to take a backseat," he said in a research note.