European stocks slumped Monday, declining on fears over China's struggling property sector as well as the Chinese effort to rein in commodity prices.
The broad retreat came amid concerns over property developer China Evergrande Group. Market participants increasingly believe that Beijing will let Evergrande fail and inflict losses on its shareholders and bondholders. The company's debt burden is the biggest for any publicly traded real estate management or development company in the world.
Shares of Evergrande, which said Sept. 13 it was facing unprecedented difficulties, tumbled 12% in Hong Kong to their lowest level in a decade. The city's Hang Seng Index slid by 3.4%. Mainland Chinese markets were closed for a holiday.
"Everyone is looking at Evergrande and saying 'has the time come for a major default in that area, and then the potential for contagion into the broader property sector?'" said Edward Park, chief investment officer at Brooks Macdonald. "It's an imminent risk now rather than being a theoretical risk as it has been for the past few years."
Other factors weighing on markets Monday included a natural-gas shortage in Europe that has prompted the U.K. government to hold emergency talks with energy suppliers, Mr. Park said.
Shares on the move:
Prudential lost 5.9% in London after the insurer said it planned to raise 22.49 billion Hong Kong dollars, equivalent to around $2.9 billion, by issuing new shares.
The biggest Stoxx 600 gainer was Deutsche Lufthansa which rose 4% after announcing a EUR2.1 billion stock sale to repay its bailout.
The continued rout in iron-ore futures sent miners including Anglo American and Rio Tinto sharply lower, as worries about the world's second-largest economy mounted with questions surrounding the ability of property developer China Evergrande to make two interest payments this week.
Data in focus:
German producer prices rose sharply again in August, and Commerzbank said the end of the upward trend is still a long way off. Prices were 12% higher than a year ago.
Higher energy and intermediate product prices were once again the main drivers of the upsurge, Commerzbank's senior economist Ralph Solveen said.
Intermediate products were 17.1% more expensive than a year ago, meaning the steep upward trend is unbroken, he said. This strong inflation in intermediate products is driving up prices for consumer goods, which are almost 2% higher than a year ago, Solveen said.
This increase is likely to continue in the coming months, both at producer and consumer levels, Commerzbank forecasts.
U.S. stock futures fell, pointing to an extension of recent losses on Wall Street as jitters in China's indebted property sector rippled into global markets.
The concerns over Evergrande struck at a time when investors had already grown more cautious about the outlook for stocks, after a booming rally for much of the year. Money managers have said valuations look elevated and pointed to signs that the economic recovery in the U.S. has lost steam amid the spread of the Delta variant of the coronavirus.
The Federal Reserve will likely use its policy decision Wednesday to pave the way to pare back some of the stimulus it lavished on markets last year, he added.
The dollar rose broadly ahead of a Fed meeting announcement Wednesday, when policy makers might say something regarding plans to taper asset purchases.
"The FX market starts a very busy week with a stronger USD across the board amid renewed expectations of a hawkish FOMC meeting outcome on Wednesday on the back of the series of stronger-than-expected economic data released in the past week," UniCredit said.
The Fed is very unlikely to provide details on the composition and pace of planned tapering, but should "leave little doubt" that these will be communicated in early November, the bank's analysts said.
The DXY index earlier hit a four-week high of 93.3620, while EUR/USD hit a four-week low of 1.1710, according to FactSet.
The pound weakened 0.6% against the dollar to trade at $1.3670.
European credit markets are likely to withstand a possible bond taper by the Fed and slower company earnings growth, says UniCredit.
This week's eurozone economic data is likely to show a slowdown in economic growth, despite remaining strong, which "might lead to a slowdown in the pace of corporate earnings growth over the months to come," analysts at the bank said.
This might keep markets nervous at a time when the Fed seems set to signal that it will possibly start tapering asset purchases by the end of the year.
Yet European Central Bank bond purchases are helping to absorb the still high bond supply, which should limit the risks for euro-area rates and European credit, they said.
The term premium--the yield premium investors demand for holding long-dated bonds rather than short-dated ones--is set to increase in the eurozone as the European Central Bank will buy less assets next year, said Societe Generale.
"As the ECB is set to absorb less of the EGBs--eurozone government bonds--and EU issuance next year, there is room for a further rebuilding of EUR term premium," it said.
Societe Generale recommends investors to remain short duration and keep five-year to 30-year steepener positions. Societe Generale added that the retracement of German Bund yields from the July rally is consistent with the strong recovery in the eurozone despite remaining uncertainties.
Pimco has long expected the Fed to announce tapering plans at its December meeting but now it believes "there is a decent chance that they announce as early as November," said Tiffany Wilding, portfolio manager and US economist at the asset manager.
Still, because this coincides with the Treasury's so called debt ceiling "X-date", the date when Treasury will run out of funding, "we suspect the tapering decision will be delayed to the December meeting," she said.
Pimco has downgraded real GDP growth estimates since the July meeting, now expecting 3Q real GDP growth of 3% quarter-on-quarter compared with 6.5% originally expected.
Oil prices were under pressure early in the week, with most equities indexes also in the red and the dollar making gains--a stronger U.S. currency makes dollar-denominated commodities like oil more expensive for other currency holders.
"For the remainder of the week, the market is likely to be influenced by further external factors, " said ING's Warren Patterson, with investors watching the meeting of the Fed later this week and soaring gas prices.
Gold wavered as investors look ahead to the Fed meeting for clues about the tapering timeline. The dollar and bond yields were creeping higher ahead of the meeting, keeping gold prices capped, Commerzbank said.
Investors will also be looking to see what the Fed says about interest rates, the bank says. "If Fed Chair Powell can convince the market that tapering will not be quickly followed by any rate hikes, gold could recover somewhat in the second half of the week," Commerzbank said.
Copper prices fell for a third consecutive day, as investors' worries about China's Evergrande mounted.
Three-month copper on the LME dropped 1.9% to $9,090.50 a metric ton, adding to a 4% fall last week. Aluminum also dropped 0.6% to $2,857.50 a ton while nickel slumped $18,835 a ton.
The woes of heavily indebted property giant Evergrande are hitting shares of the nation's property companies and sparking worries about the spillover impact from the company's potential collapse.
"Investors seem to be preparing for the inevitable collapse of the entire operation," said Malcolm Freeman, CEO of brokerage Kingdom Futures. "This has all proved too much for the metals which are all under attack," he said.
Prudential Plans to Raise Up to US$2.89B in Hong Kong Share Offer
Prudential PLC is planning to raise up to 22.49 billion Hong Kong dollars ($2.89 billion) by issuing new shares as the insurer looks to redeem high-coupon debt due in six months and invest for growth.
The U.K. insurer is planning to sell 130.78 million new shares in the Hong Kong offer and has set a maximum price of HK$172 per share, Prudential said Monday.
Lufthansa Eyes $2.5 Bln From New Capital Raise
Deutsche Lufthansa AG is launching a capital increase worth 2.14 billion euros ($2.51 billion) as the German airline looks to strengthen its equity position.
Starting Wednesday and running until Oct. 5, just under 6 million new shares will be offered to shareholders, doubling the current number, at a subscription price of EUR3.58 for each new share. Lufthansa shares closed Friday at EUR8.21.
Merck KGaA to Invest More Than $3.5 Bln in Electronics Business
Merck KGaA said Monday that it will invest in its electronics business over the coming years, as it looks to capitalize on global growth in demand for semiconductor and display materials.
The German company plans to invest more than 3 billion euros ($3.52 billion) in its electronics division by the end of 2025. Money will go into research and development, as well as into capital expenditure on long-term fixed assets, Merck KGaA said.
SSE Says There Has Been No Decision to Break Up Group; Plans to Accelerate Investment Through 2026
SSE PLC said Monday that there has been no decision to break up the company after media reports that a significant shareholder was pushing for a separation of the renewable portfolio from the regulated networks business. It also said that in November it will publish details of significantly increased investment plans through 2026.
The energy company said its clear strategic focus is on renewables and on regulated electricity networks, and these businesses have exciting growth potential aligned with net zero targets.
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