(Reuters) - Global equity markets, bond prices and commodities tumbled
on Monday, entering another week of heavy selloff, on worries about
the U.S. central bank's plans to scale back its money printing,
combined with tighter financial conditions in China.
Prices of U.S. Treasuries also resumed their slide on Monday, and
benchmark yields climbed to a nearly two-year high. Wall Street opened
sharply lower, with the Dow Jones industrial average retreating more
than 200 points in early trading, joining a global selloff after
concerns about liquidity crunch in China sent Shanghai stocks down
more than 5 percent.
The broad selloff added to more than $1 trillion in losses in global
equity markets in the five days ended June 21, based on the market
value of MSCI World Index.
The U.S. stock market alone lost about $354.4 billion during the
five-day period, while the U.S. bond market erased about $390.8
billion, measured by the market value of the BofA/Merrill Lynch Broad
Market Index.
"There is no fund flow here. The money out of the bond market is not
going into equities or anywhere else. Prices are going down because
there is panic selling when buyers are very hesitant," said James
Dailey, senior portfolio manager at Team Asset Strategy Fund in
Harrisburg, Pennsylvania.
"The hardest hit is no doubt the bond market. The decline that we have
seen in the past four weeks in the bond market would be equivalent to
a 30-35 percent decline in the stock market considering bonds are
traditionally not volatile."
The declines stem from Federal Reserve's signal last week that the era
of cheap central bank money - which caused many assets to hit record
highs - was coming to an end. But they have been exacerbated by
China's battle to transition to a lower-growth economy.
Both events are unprecedented and have driven a sharp rise in risk
aversion by investors fearing a long period of volatility across
markets.
The shift out of assets that have benefited most from cheap money has
been sharpest in the U.S. debt market, where yields on 10-year
Treasury notes spiked to two-year highs of 2.6 percent on Monday.
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The yield on two-year U.S. Treasury notes rose to 0.433 percent, which
was its highest level since July 2011.
This rise, and the brighter outlook for the U.S. economy, which was
behind the Fed's decision, has favored the dollar against most major
currencies. The dollar index .DXY, was up 0.2 percent at 82.556 after
rising as high as 82.841, its highest since June 5. The gains built on
last week's 2.2 percent rally, its biggest weekly rise since November,
2011.
WALL STREET TUMBLES
U.S. stocks extended their losses, falling more than 1 percent after
the S&P 500 index's biggest weekly decline in two months as investors
repriced shares in the wake of the Federal Reserve's plans to withdraw
its stimulus.
Investor sentiment also was hurt by a cash crunch in China, which
could further slow Chinese growth. Markets in Shanghai and Hong Kong
posted their biggest daily loss in almost four years.
"We are starting to see that follow-through in Asia, which is all part
of the broader narrative - the focus on a lack of stimulus, a creeping
higher in rates and the potential impact for less liquidity globally,"
said Peter Kenny, chief market strategist at Knight Capital in Jersey
City, New Jersey.
The Dow Jones industrial average .DJI was down 186.54 points, or 1.26
percent, at 14,612.86. The Standard & Poor's 500 Index .SPX was down
23.78 points, or 1.49 percent, at 1,568.65. The Nasdaq Composite Index
.IXIC was down 45.46 points, or 1.35 percent, at 3,311.79.
As investors retreated into the dollar, share markets tumbled, with
the falls heaviest in many of the world's major emerging markets.
MSCI's benchmark index for stocks in the emerging world .MSCIEF fell
2.1 percent, extending losses for a fifth straight day to touch
one-year lows. <EMRG/FRX>
The rise in Treasury yields and better prospects for the U.S. economy
have undermined the attraction of emerging markets, as China's efforts
to clean up its banking system and switch to a slower growth
trajectory raises fears of greater instability.
"The China story is something that people are aware of and keeping an
eye on, but broadly people are still digesting the comments of the
Fed," RBS emerging markets analyst Mohammed Kazmi said.
MSCI's main world equity index .MIWD00000PUS, which tracks stocks in
45 countries, shed 1.8 percent to add to last week's 3.2 percent loss,
its worst weekly fall since May 2012.
CHINA CRUNCH
The concerns over China's economic health spread to mining stocks in
Europe, adding to worries about the impact of the Fed's tapering and
pushing the FTSEurofirst 300 .FTEU3 index of top companies down 1.3
percent by midday to 1,124.10 points.
The Euro STOXX 50 Volatility index .V2TX, known as the VSTOXX, jumped
to a nine-month high, signaling a sharp rise in risk aversion among
investors.
European equity markets weakened despite data showing German business
morale picking up for a second straight month in June, pointing to a
slow recovery for Europe's largest economy.
Commodity markets were faced with the additional pressure of the
stronger dollar, which makes them more expensive to investors outside
the United States.
Copper dropped to its lowest price in 21 months, while oil slipped
below $100 a barrel for the first time in three weeks. <O/R>
"Global money supply will be wound back and the level of investment in
commodities like oil will be pulled back," said Michael McCarthy,
chief market strategist at CMC Markets.
Gold fell more than 1 percent, extending last week's 7 percent
decline, with investors shunning gold's appeal as a safe-haven asset.
(Reporting by Angela Moon; Editing by Dan Grebler)
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