Emerging sell-off hits European shares, lifts yen

Mon Jan 27, 2014 7:11am EST
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By Natsuko Waki

LONDON (Reuters) - Emerging markets led a global sell-off in risky assets on Monday as European stocks followed sharp falls in Asia and safe-haven assets such as the yen and gold rallied.

Concerns about China's economic slowdown and its shadow banking sector, combined with expectations that the Federal Reserve will scale back its bond buying further, are piling pressure on emerging markets dependent on external financing.

Political risks in Ukraine, Turkey and Thailand as well as a looming financial crisis in Argentina are compounding the problem of emerging markets in a week when the Fed is expected to cut its monthly bond purchases by another $10 billion.

Emerging markets experienced a similar synchronized sell-off last May when the Fed initially suggested stimulus wind-down. But this time, local factors are playing a bigger role.

"The question is one of contagion and risks and that's what we're living through at the moment. You can see the source of the problem is not somewhere else but directly in emerging markets. That's really worrying the market," said David Bloom, head of currency strategy at HSBC.

MSCI world equity index .MIWD00000PUS fell 0.6 percent to 394.15, its lowest level in more than a month, following Asia's decline .MIAPJ0000PUS of 1.6 percent.

China's shadow banking sector, a key source of financing for local corporates, is under the spotlight.

A Chinese trust firm said it had reached an agreement to resolve a troubled high yield investment product, just days away from what could have been a precedent-setting default in China's shadow banking system.   Continued...

A man looks at at an electronic stock quotation board outside a brokerage in Tokyo January 14, 2014. REUTERS/Issei Kato