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GLOBAL MARKETS-European stocks slump to 21-month low, Wall Street braces

Published 11/10/2018, 11:47 pm
Updated 11/10/2018, 11:50 pm
© Reuters.  GLOBAL MARKETS-European stocks slump to 21-month low, Wall Street braces

* Graphic: World FX rates in 2018 http://tmsnrt.rs/2egbfVh

* Europe buckles again as selloff rumbles on

* Bunds, treasuries benefit in safe haven scramble

* Oil prices and industrial metals slide

* Emerging market stocks battered as China gets smashed

* Dollar loses ground against Japanese yen

* Italy squeeze through debt sale

By Marc Jones

LONDON, Oct 11 (Reuters) - European stocks slumped to a 21-month low on Thursday after Wall Street's worst losses in eight months triggered a surge of global selling that also hit Asia and emerging markets.

Losses in London .FTSE , Paris .FCHI and Milan .FTMIB were at nearly 2 percent ahead of what looked set to be another early dive from Wall Street .N , although it wasn't quite as dramatic as the overnight session in Asia.

MSCI's broadest index of Asian shares not including Japan .MIAPJ0000PUS ended down 3.6 percent, having struck its lowest level since March 2017. China's main indexes had slumped over 5 percent .SS .

It meant MSCI's 24-country emerging market index .MSCIEF was having its worst day since early 2016 EMRG/FRX , after Wall Street's swoon had given the 47-country world index equivalent .WORLD its worst day since February.

"Equity markets are locked in a sharp sell-off, with concern around how far yields will rise, warnings from the IMF about financial stability risks and continued trade tension all driving uncertainty," summed up analysts at ANZ.

The sell-off, which came as the head of the International Monetary Fund, Christine Lagarde, said stock market valuations have been "extremely high", erased hundreds of billions of dollars of global wealth Nikkei .N225 ended down 3.9 percent, its steepest daily drop since March. The broader TOPIX .TOPX lost around $207 billion in market value, falling 3.5 percent.

Shanghai's .SSEC drop was its most severe since February 2016 and left it at its lowest level since late 2014. Shares in Taiwan were even harder hit .TWII , losing 6.3 percent. Seoul's Kospi index .KS11 dropped 3.8 percent.

"I think what happened was that we were a maximum elevation of risk appetite and maximum valuation of (U.S.) large caps and tech, so when you have that situation you are always vulnerable," said UBP macro and FX strategist Koon Chow.

Europe's traders retreated to the safety of German and other higher-rated government bonds.

Italian bonds aren't on that list though, and though they squeezed through a 6.5 billion euro debt sale, they saw more selling amid ongoing concern about the country's financial health. GVD/EUR

"It remains to be seen whether the accelerating equity plunge is a healthy correction or the tip of the iceberg," Commerzbank (DE:CBKG) analysts said in a note.

BLOOD ON THE STREET

Sinking global shares had raised the stakes for U.S. inflation figures which ended up coming in relatively tame. High inflation would only stoke speculation of more aggressive rate hikes from the Federal Reserve - one of the things that has spooked markets.

On Wall Street, the S&P500's sharpest one-day fall since February on Tuesday had wiped out around $850 billion as the S&P toppled over 3 percent and the Nasdaq's high-flying tech shares tumbled even more on fears of slowing demand.

The bloodletting attracted the attention of U.S. President Donald Trump, who pointed an accusing finger at the Fed for raising interest rates.

"I really disagree with what the Fed is doing," Trump told reporters before a political rally in Pennsylvania. "I think the Fed has gone crazy" commentary from Fed policymakers triggered the sell- off in Treasuries last week and sent long-term yields to their highest in seven years.

The surge made stocks look less attractive compared with bonds while also threatening to curb economic activity and profits.

"The rise in Treasury yields has been the primary catalyst for the sell-off in equities, since higher yields suggest a lower present value of future dividend streams, assuming an unchanged economic outlook," said Steven Friedman, senior economist at BNP Paribas (PA:BNPP) Asset Management.

"It is also possible that equity investors are growing concerned that the Federal Reserve's projected rate path will choke off the expansion."

YUAN A FLASHPOINT

The shift in yields is also sucking funds out of emerging markets. More than $1 trillion has been wiped off MSCI's EM index since January and there has been particular pressure on the Chinese yuan as Beijing fights a protracted trade battle with the United States.

China's central bank has been allowing the yuan to gradually decline, breaking the 6.9000 barrier and leading speculators to push the dollar up to 6.9377 CNH= at 0602 GMT.

China's move has forced other emerging-market currencies to weaken to stay competitive and drawn the ire of the United States, which sees it as an unfair devaluation.

"The yuan has already weakened significantly, to offset the tariffs announced so far," said Alan Ruskin, Deutsche's global head of G10 FX strategy. "Further weakness could exacerbate concerns of a self-fulfilling flight of capital and a loss of control."

The dollar was already losing ground to both the yen and the euro, as investors favoured currencies of countries that boasted large current account surpluses.

The euro was at $1.1550 EUR= , up from a low of $1.1429 early in the week. The dollar lapsed to 112.17 yen JPY=D3 , a retreat from last week's 114.54 peak.

That left the dollar at 95.263 .DXY against a basket of currencies. USD/

In commodity markets, gold struggled to get any safety bid and edged down to $1,192.77 XAU= .

Oil prices skidded in line with U.S. equity markets, even though energy traders worried about shrinking Iranian supply from U.S. sanctions and kept an eye on Hurricane Michael, which shut down some U.S. Gulf of Mexico oil output. O/N

Brent crude LCOc1 fell 1.6 percent to $81.75 a barrel. U.S. crude dropped 1.5 percent to $72.07 CLc1 Submerging markets

https://reut.rs/2yvgDeo

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Additinal reporting by Wayne Cole in Sydney and Abhinav Ramnarayan in London Editing by Matthew Mpoke Bigg)

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