Fears over US Fed tapering, China property roil markets

NEW YORK • The global stock rout sparked by investor angst over China's real-estate sector and US Federal Reserve tapering worsened yesterday, with US stocks falling more than 1 per cent in early trading and European equities tumbling the most in almost a year.

The S&P 500 fell the most on an intraday basis in a month, a test for the buy-the-dip mentality as the gauge jabs at its 50-day moving average.

Treasuries gained along with the dollar before tomorrow's Federal Reserve meeting, where United States policymakers are expected to start laying the groundwork for paring stimulus.

Mr David Bahnsen, chief in-vestment officer at Newport Beach, California-based wealth management firm The Bahnsen Group, said: "While the Evergrande situation is front and centre, the reality is, stock market valuations are overstretched and the market has enjoyed too long of a break from volatility."

The Stoxx Europe 600 index dropped more than 2 per cent to a two-month low and was on track at one point for the biggest decline since October last year.

Raw materials led the broad-based retreat as iron ore extended a slump below US$100 (S$135) a tonne and base metals declined after China stepped up restrictions on industrial activity.

Germany's DAX underperformed as a rebalancing takes effect.

Hong Kong shares slumped amid the biggest sell-off in property stocks in more than a year as traders tracked the risk of contagion from the debt crisis at developer China Evergrande Group, which is fuelling new fears about China's growth path.

Shares in Evergrande, which has been scrambling to raise funds to pay its many lenders, suppliers and investors, closed down 10.2 per cent at HK$2.28 yesterday. It earlier plummeted 19 per cent to its lowest level in 11 years.

Regulators have warned that Evergrande's US$305 billion (S$412 billion) of liabilities could spark broader risks to China's financial system if its debts are not stabilised.

Aside from Evergrande and the prospect of reduced Fed stimulus, financial markets also face risks from uncertainty over the outlook for President Joe Biden's US$4 trillion economic agenda as well as the need to raise or suspend the US debt ceiling.

Investors were already fretting over a slowing global recovery from the pandemic and inflation stoked by commodity prices.

"The edges of the bullish narrative cover are being pulled and the darker underlying reality is coming to the fore," said Mr Sebastien Galy, a senior macro strategist at Nordea Investment Funds.

"It is taking the market more time to price in these shocks than I had expected, and the market is far more realistic as the buy-on-dip mentality fades with the fear of inflation."

Treasury Secretary Janet Yellen said the US government will run out of money to pay its bills some time next month without action on the debt ceiling, warning of "economic catastrophe" unless lawmakers take the necessary steps.

In Asia, Hong Kong real estate companies bore the brunt of the selling yesterday, with the Hang Seng Property Index tumbling 6.7 per cent for its biggest drop since May last year.

Chinese officials told Hong Kong developers that Beijing is no longer willing to tolerate what it calls monopoly behaviour, Reuters reported last Friday. The officials did not lay out a road map or a deadline, according to Reuters, which cited unidentified developers.

Hong Kong has long struggled to bring home prices under control amid outsized demand, limited supply and low borrowing costs. The city's average property value was a world-beating US$1.25 million as at June last year, according to CBRE Group.

"This is a paradigm shift," said Mr Hao Hong, chief strategist at Bocom International, referring to the Reuters report. "People need to keep a close look."

BLOOMBERG, REUTERS