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High-Pressure Week for Global Markets Starts With Steep Losses




 

(Bloomberg) -- A big week for global markets is off to a messy start as stocks plunge around the world and haven bids break out. Blame everything from China Evergrande Group's woes and the collapse in iron-ore prices to fears over the U.S. debt ceiling.

The endgame for creditors to the Chinese property giant has arrived just as traders are in a state of alert before the Federal Reserve's meeting this week.

The Stoxx Europe 600 index dropped 1.9% Monday, on track for the biggest decline in two months, as futures on the S&P 500 test key 50-day support levels.

"There is a very narrow path that markets are treading where the margin of error is very small," said Colin Finlayson, investment manager at Aegon Asset Management in Edinburgh, who's paring back a short-duration position in bonds. "Any surprise -- be it from China, the spread of the delta variant, or a communication out of the FOMC -- will be disproportionate," he said.

Adding to the bearish tone on Wall Street, Morgan Stanley strategists led by Michael Wilson is out with warning to clients that the S&P 500 could see a 20% correction on bad news over earnings revisions and economic growth.

Here is a look at some of the key issues facing investors and how they are positioned:

China Evergrande

Angst about the world's most-indebted developer is spreading as senior Chinese policy makers stay silent on whether the government will step in to prevent a messy collapse. It has sparked the biggest selloff in Hong Kong property stocks in more than a year and dragged down everything from banks to Ping An Insurance Group Co. and high-yield dollar debt.

Interest payments on two Evergrande bonds come due Thursday, a key test of whether the company will continue meeting obligations to debt holders even as it falls behind on payments to banks, suppliers and holders of onshore investment products in China.

Iron Ore

The epic selloff in iron ore continued amid a rout that's brought prices below $100 a ton. Futures in Singapore fell to $95 on Monday as China's push to rein in its steel output hammers demand. Iron ore has more than halved since rising to a record in May with some market participants saying a decline to $70 is a possibility.

Yield Curve

For Treasury bears -- the majority of Wall Street -- this week's Fed meeting represents one of the last prospective triggers this year for a decisive break higher in yields. Traders are anticipating officials will hint at a plan to curb bond buying and are ready for a shift in the central bank's new forecasts for its benchmark rate.

Primary dealers surveyed by Bloomberg News predict on average that 10-year yields will be more than 30 basis points higher by year-end. Yet the yield curve has flattened by the most since the early days of the pandemic, suggesting there is still the possibility of a dovish surprise.

Emerging Markets

Hedge funds are also growing increasingly bearish on emerging-market stocks -- seen by many as particularly sensitive to a Fed taper tantrum. Leveraged fund positions on futures linked to the MSCI Emerging Markets Index flipped to net short for the first time in more than a year, according to data from the Commodity Futures Trading Commission.

The gauge of developing-market equities has tumbled 8% this quarter -- underperforming its developed-markets peer by about 10 percentage points -- weighed down as well by Beijing's crackdown on private enterprise.

U.S. Stocks

The S&P 500 Index has fallen for eight out of the last 10 sessions, albeit with a modest enough decline of just over 2%. The U.S. equity benchmark is sitting around its 50-day moving average, which has provided robust support for much of the year. The key technical level has become a closely-watched flashpoint as investors brace for a key week for determining market direction into quarter-end.

(Adds Aegon quote, Morgan Stanley stock call)

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