Europe set for its worst session since October

Miners drop over 5%

  

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EUROPE SET FOR ITS WORST SESSION SINCE DECEMBER (1224 GMT)

The sell-off has gradually accelerated in Europe with the STOXX 600 now on course for its worst session since October 2020, losing over 2.3%.

With Wall street futures losing between 1.7% and 1.9% at the moment, there's potentially further down to go in late afternoon trading.

Default worries about China's Evergrande are hitting global markets through all assets classes, notably fixed income with a fall of euro zone yields, but equities are definitely on the front line.

While miners, which are typically exposed to commodities-hungry China seemed like they were going to take the main hit, the pain has spread throughout sectors.

Banks (-4%) and financials are actually taking the most points out of the pan-European index while autos (-4.3%) are also in a tough spot.

Among regional bourses, Frankfurt and Paris are in the spotlight with falls of 2.9% and 2.7% respectively.

(Julien Ponthus)

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WHO'S MOST EXPOSED TO CHINA (1121 GMT)

China contagion is the name of the game today with worries developer Evergrande may default on its debt adding another layer of fog following Beijing's recent regulatory crackdown and signs the world's no. 2 economy is slowing down.

Assets from bonds to currencies are feeling the heat from China but it's in the equity space that investors can have a more granular view of what's at stake.

In this respect, Europe is seen as particularly vulnerable given its export oriented economy.

No surprise then that shares in European miners and luxury houses, which rely bigly on China sales, are under heavy selling pressure this morning.

But it's not just basic resources and handbags. Check out this Morgan Stanley table showing the top 50 European stocks with the highest revenue exposure to China.

According to MS, Europe Inc has an 8% exposure to China, compared to just 4% of U.S. companies, 6% for Japanese companies and 3.6% for EM companies. Chinese firms derive 86% of their revenues from their home market.

(Danilo Masoni)

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FAT AND FLAT (1111 GMT)

Investment returns from equity markets in the post-pandemic world will be "fat and flat", a new strategy paper by Goldman Sachs said on Monday.

Breaking down the equity market cycle since 1900, the U.S. investment bank found there has been three powerful secular equity market super cycles since World War II: 1945-1968, 1982-2000 and 2009-2020 with each driven by a combination of one or more of the following factors: very strong growth, falling interest rates, low starting valuations together with rising profit margins.

But the post-pandemic economic cycle starts from a position of record low interest rates, high valuation and high margins, implying lower longer-term returns than previous economic regimes though returns is likely to be higher than bonds.

Therefore, the return profile is largely described as "fat and flat with low but positive aggregate returns over a period of time but punctuated with large cyclical swings."

"We are now at the opposite end of a 'super cycle', with record low interest rates and inflation expectations, and high valuations and margins," a team of strategists led by Peter Oppenheimer said in a note. "Many of the tailwinds for equity returns enjoyed in recent decades are unlikely to be repeated and may even start to reverse to some extent."

Moreover, geopolitical pressures and supply chain disruptions have increased the trend towards on-shoring rather than globalisation while U.S. corporate tax rates are set to rise with progress being made to agree on a global minimum corporate tax rate, they said.

(Saikat Chatterjee)

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MINERS DRAG STOXX 600 TO TWO-MONTH LOW (0911 GMT)

Mining stocks are dragging down the STOXX 600 on a slide in commodities price after debt troubles at property group China Evergrande added to concerns about the health of China's economy.

The basic resources index plummets 4.6% to its lowest since February, pushing the pan European index down 1.9% to a two-month low, following the doom and gloom of Chinese markets.

China consumes some 55 % of global copper and iron ore, almost 60 % of nickel and some 50 % of lithium. 

Luxury stocks are also being heavily hit due to their China exposure with LVMH down 2.3%, tracking weakness in its Hong Kong listed peers.

Investors are also watching if major central banks will start giving cues about tapering their pandemic-era stimulus programmes at various meetings this week.

Ahead of elections in Germany, the DAX is down 2.1%, touching its lowest level since July.

In terms of single stocks, shares of UK insurer Prudential fall 7% after the company said it plans to raise HK$22.5 bln ($2.9 bln) through concurrent public offer and international share placing on Hong Kong Stock Exchange.

(Joice Alves)

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WATCH THOSE SPIRALLING GAS PRICES (0709 GMT)

A massive week in monetary policy, with some 16 central banks holding meetings and possibly the first rate hike from a developed nation -- Norway. Not to say others will follow any time soon; the Federal Reserve for instance may strees its own rate rises remain distant. Others such as Switzerland and Japan are likely to stay resolutely dovish.

In the meantime, other sagas are focusing investors' minds. Chinese property developer Evergrande's inexorable journey towards default is pummelling Hong Kong stocks (mainland markets are shut) and has taken yields on Chinese junk bonds to 14%, the highest in almost a decade.

So it's a firmly risk-off on Monday with European and U.S. equity futures down 1%, following Friday's dismal session when the S&P 500 plunged nearly to one-month lows and the VIX volatility gauge surged to a one-month high .

Much of that is, of course, down to concerns for economic growth and inflation, the debt ceiling wrangling in Congress and persistently high COVID caseloads.

Which takes us to the other issue of the day -- spiralling gas prices and the potential impact on inflation.

Already, these have forced some power producers out of business and shut fertiliser plants in Britain. Knock-on effects look inevitable, on sectors ranging from slaughter houses to supermarkets, alongside higher winter heating bills.

Pressure is growing on authorities -- Britain is planning measures to shield businesses and consumers and U.S. manufacturers are urging curbs on liquid gas (LNG) exports. Politics enters the picture too -- EU lawmakers have demanded authorities probe Russia's Gazprom for market manipulation.

(Sujata Rao)

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EUROPEAN FUTURES ON THE RED AHEAD OF CENTRAL BANK MEETINGS

European shares seen on the red mirroring Asian shares, with property developer China Evergrande dragging Hong Kong stocks to a near one-year low, and ahead of a week packed with global central bank meetings.

The Fed is expected to lay the groundwork for a tapering at its policy meeting on Tuesday and Wednesday. Investors will also have to digest a dozen other central bank meetings including the UK, Japan, Switzerland, Sweden and Norway.

The Norges Bank is expected to become the first G10 central bank to lift rates on Thursday.

Elections in Canada and Germany are adding extra uncertainty this week.

In the UK, British Prime Minister Boris Johnson said the government will work with gas companies to ensure the consumer's needs are met amid a surge in natural gas prices, Bloomberg News reported. 

Travel stocks could get a boost after England eased COVID-19 rules for international travellers. 

(Joice Alves)

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