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Europe set for worst quarter since 2008

London, September 30, 2011

European stock index futures fell on Friday, putting shares there firmly on course to post their biggest quarterly decline since the months following the collapse of Lehman Brothers three years ago.

Asian equities also dropped, extending the worst monthly performance since the most volatile days of the global financial crisis in October 2008. Chinese shares racked up sharp losses amid fears of a property market correction.

The euro fell and was on course for the biggest monthly drop in nearly a year, with German parliamentary approvals of new powers for Europe's bailout fund having little lasting impact.

"The euro weakened as strong selling by Japanese exporters emerged but frankly, looking at the recent volatility, a dip like that is still not hugely important," said Teppei Ino, a currency analyst at Bank of Tokyo-Mitsubishi UFJ. "The question now is what is the EU's big, long-term solution to save it."

Euro STOXX 50 index futures fell 0.4 percent. Futures for Germany's DAX and France's CAC-40 fell by similar amounts, while financial spreadbetters in London called the FTSE 100 to open down as much as 0.6 percent.

Fears of a spiraling European debt crisis and a slowing global economy that would hit Asian exports caused investors to slash their bets on risky assets in the September quarter.

Markets in Asia, considered by investors to have superior fundamentals compared with developed markets in the West, were not immune, with institutional investors continuing to hedge against further Asian currency weakness, including the yuan.

China banks sold

Mainland Chinese stocks listed in Hong Kong fell 3.8 percent, underperforming the rest of the region, with investors selling off bank shares on fears over their exposure in the event of a property market slump.

Stocks in Japan, Australia and Korea were flat to slightly lower, with only Hong Kong shares among the major losers, dropping about 2.3 percent, as investors locked in profits.

While window-dressing by fund managers buying some of the quarter's outperforming issues to improve their books has helped support shares this week, further gains may be hard to get as macro concerns remain.

"Window-dressing tends to support the market at the end of quarter, and some relief about Europe's situation after the German vote is also giving buyers more confidence," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management Co.

MSCI's index of Asia Pacific shares outside Japan fell 1.0 percent after rising for three consecutive days. For the month, it was down more than 13 percent, its biggest monthly drop since October 2008.

US stock futures were down 0.5 percent after ringing up decent gains on Thursday.

In what has been another tough month for money managers with market movements largely dictated by the ebb and flow of headlines from Europe, emerging market bonds have suffered the most as investors cut positions to protect portfolios.

EPFR Global data shows emerging market bond fund outflows gathered pace in the week to September 28. A total of $3.2 billion of net outflows was recorded from emerging market bond funds, compared with the previous week's outflow of $692 million.

Hard currency bond funds saw $1 billion of outflows while local currency bond funds saw $1.6 billion in withdrawals.

In Asia, some of the biggest jumps in bond yields have been in markets where foreign positioning has been the most crowded such as Indonesia and Malaysia, while the bustling international pipeline for bond issuers in Asia has come to a grinding halt.

Currencies have also been hard hit.

As the flight to safety pushed the dollar higher against other currencies, investors such as long-only funds and banks --who bought these bonds on an unhedged basis, betting on more FX gains -- hurried to hedge positions, further exacerbating their drops.

Even a recent drive by Chinese authorities to fix the yuan's midpoint higher has failed to impress markets.

The renminbi is trading at the bottom end of a trading end against the dollar and the offshore yuan is trading at a rare steep discount against the onshore rate.

Elsewhere, the euro hovered above a eight-month low versus the dollar after German Chancellor Angela Merkel's coalition party voted on Thursday to enhance the European Financial Stability Facility's powers.

Having worked through to $1.3679 at one stage, the single currency settled back at $1.3556 with investors worried about the many problems ahead for the euro zone.

"There is still a lot of uncertainty... Economic growth in Europe and the U.S. is not that good and that will put pressure on the euro and give a bid to the dollar," said Joseph Capurso, strategist at Commonwealth Bank of Australia.

Worried investors gave the thumbs up to safe-haven bets like gold and Treasuries, with the former extending gains by 0.8 percent to around $1,626 per ounce.

US crude futures rose above $82.50 a barrel in electronic trade on Friday, extending Thursday's gains. Brent crude edged above $104 a barrel, but remained on track for the biggest quarterly drop in 15 months.-Reuters




Tags: Lehman Brothers | Collapse | europe stocks | worst |

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