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September 21, 2017

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Asia, Europe stocks sink on global economy fears

HONG KONG--Asian and European stock markets were pummeled Monday by the possibility of slowing growth in China and a further reduction in U.S. central bank stimulus.

In early European trading, the FTSE 100 index of leading British companies dropped 1 percent to 6,600.26 while Germany's DAX dropped 0.5 percent to 9,342.80. France's CAC 40 fell 0.4 percent to 4,142.70. U.S. stocks were poised for a small rebound after tumbling last week. Dow futures edged up 0.1 percent to 15,836.00. Broader S&P 500 futures climbed 0.3 percent to 1,788.40 .

Investors were awaiting a two-day meeting of the U.S. Federal Reserve starting Tuesday, where officials are expected to reduce the central bank's monthly bond buying by another US$10 billion to US$65 billion. Recent signs of a sustained recovery in the world's biggest economy will play a big role in the decision by Fed officials to scale back stimulus for a second time.

Stock prices in emerging markets have been propped up for years by investors seeking higher returns using a tide of so-called "easy money" from the Fed and other central banks. But now that the end for those policies looks to be near, some investors are fleeing stocks. The capital flight has slammed some places particularly hard, such as Argentina, where the peso dropped 16 percent against the dollar over two days last week.

"The growing turmoil in emerging markets is inflicting damage on risk assets across the board and no letup is expected in the near term," said Mitul Kotecha, head of global markets research for Asia at Credit Agricole CIB, in a report.

The global sell-off was triggered by the preliminary results Thursday of a survey showing that China's massive manufacturing industry would contract in January for the first time in six months, the latest sign that a painful slowdown in the world's No. 2 economy is likely to continue.

"We've seen brief slowdowns in China before," said Michael Every, head of financial markets research for Asia-Pacific at Rabobank. "The difference is we don't expect to see rapid acceleration again this time, because they're trying to clamp down on credit growth to prevent nonperforming loans going even higher than they are."

Investors are more sensitive to turmoil in emerging markets such as China because they're playing an increasingly large role in the world economy. Emerging and developing economies account for nearly 40 percent of the global economy, up from 18 percent two decades ago, with China's share zipping to 14 percent from 4 percent, according to Societe-Generale.

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