Emerging markets led a global sell-off in risky assets on Monday as European stocks followed sharp falls in Asia and safe-haven assets such as the yen and gold rallied.
Concerns about China's economic slowdown and its shadow banking sector, combined with expectations that the Federal Reserve will scale back its bond buying further, are piling pressure on emerging markets dependent on external financing.
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Political risks in Ukraine, Turkey and Thailand as well as a looming financial crisis in Argentina are compounding the problem of emerging markets in a week when the Fed is expected to cut its monthly bond purchases by another $10 billion.
Emerging markets experienced a similar synchronized sell-off last May when the Fed initially suggested stimulus wind-down. But this time, local factors are playing a bigger role.
"The question is one of contagion and risks and that's what we're living through at the moment. You can see the source of the problem is not somewhere else but directly in emerging markets. That's really worrying the market," said David Bloom, head of currency strategy at HSBC.
MSCI world equity index <.MIWD00000PUS> fell 0.6 percent to 394.15, its lowest level in more than a month, following Asia's decline <.MIAPJ0000PUS> of 1.6 percent.
China's shadow banking sector, a key source of financing for local corporates, is under the spotlight.
A Chinese trust firm said it had reached an agreement to resolve a troubled high yield investment product, just days away from what could have been a precedent-setting default in China's shadow banking system.
The Turkish lira, which has been leading the rout in emerging currencies amid a corruption scandal that has rocked Prime Minister Tayyip Erdogan's government, hit a record low of 2.39 to the dollar before regaining some ground after the central bank said it would hold an emergency meeting on Tuesday.
The benchmark emerging stock index <.MSCIEF> hit a 4-1/2 month trough, falling 1.7 percent on the day to be on track for the biggest one-day fall since August.
Emerging stocks are the worst performing asset so far this year, with year-to-date losses of 5.2 percent.
U.S. stock futures are pointing to a firmer open, however, after the S&P 500 index <.SPX> last week posted its worst week since June 2012.
European stocks <.FTEU3> are down 0.7 percent. Banking stocks lost more than half a percent <.SX7P>.
A German media report citing an OECD study that showed European banks have a combined capital shortfall of about 84 billion euros also hit sentiment [ID:nL5N0KZ0C1].
"Sudden fears about emerging markets and also potential capital shortfalls for some European banks are rattling investors. People have been a bit complacent lately, so it's quite logical to get a correction," said David Thebault, head of quantitative sales trading, at Global Equities.
The yen hit a seven-week high of 101.77 per dollar while gold also rose to a two-month high above $1,278 an ounce.
The 10-year U.S. Treasury yield hit a new two-month low of 2.71 percent.
Bund futures were down 15 ticks.
The dollar <.DXY> was slightly stronger against a basket of major currencies.