27 October 2016
European stocks dived after their Asian peers slumped to three-year lows as the Chinese market rout panicked investors. Photo: Reuters
European stocks dived after their Asian peers slumped to three-year lows as the Chinese market rout panicked investors. Photo: Reuters

World markets in turmoil amid China rout

Alarm bells rang across world markets on Monday as a plunge in Chinese shares and a sharp drop in the dollar and major commodities panicked investors.

European stocks opened more than 3 percent in the red after their Asian counterparts slumped to three-year lows as a three-month-long rout in Chinese equities threatened to get out of hand, Reuters reported.

The Shanghai Composite Index slid 8.5 percent, the most since 2007, and Hong Kong’s Hang Seng Index fell 5.8 percent, tumbling further into a bear market.

Safe-haven government bonds as well as the yen and the euro rallied as widespread fears of a China-led global economic slowdown kicked in.

“Markets are panicking. Things are starting look like the Asian financial crisis in the late 1990s. Speculators are selling assets that seem the most vulnerable,” said Takako Masai, head of research at Shinsei Bank in Tokyo.

With serious doubts now emerging about the likelihood of a US interest rate rise this year, the dollar slid against other major currencies. It was last 121.05 yen having gone as low as 120.73 in Asia, a level last seen on July 9.

The Australian dollar tanked to six-year lows and many emerging market currencies also plunged, whilst the frantic dash to safety pushed the euro to a six and a half month high.

Commodity markets took a fresh battering. Brent and US crude oil futures hit six and a half year lows as concerns about a global supply glut added to worries over potentially weaker demand from China. 

US crude was down 3 percent at US$39.20 a barrel while Brent lost 2.4 percent to US$44.40 a barrel.

Copper, seen as a barometer of global industrial demand, tumbled 2.5 percent, with three-month copper on the London Metal Exchange hitting a six-year low of US$4,920 a ton.

Nickel slid 4.6 percent to its lowest since 2009 at US$9,730 a ton.

Gold edged down, but stayed close to its highest level in almost seven week.

“Certainly gold is finding itself a bit of a safe-haven bid with all the volatility that’s going on in markets,” said Victor Thianpiriya, commodity strategist at ANZ Bank.

“If things do get a lot worse then gold will certainly go a lot higher.”

Spot gold was down 0.6 percent at US$1,153.20 an ounce at 2.30 pm Hong Kong time, coming off the day’s peak of US$1,165.11.

Bourses from Japan to Malaysia were hit hard as Chinese stocks plummeted immediately after the open on Monday despite the government’s move over the weekend to formalize the rules allowing pension funds to invest in the stock market.

“China could be forced to devalue the yuan even more should its economy falter, and the equity markets are dealing with the prospect of a weaker yuan amplifying the negative impact from a sluggish Chinese economy,” said Eiji Kinouchi, chief technical analyst at Daiwa Securities in Tokyo.

Sending global equity markets into a tailspin, a Caixin/Markit PMI survey on Friday showed Chinese manufacturing activity shrank at the fastest pace since 2009.

Even before the Chinese markets opened, stocks in Asia took a beating after fears of a China-led global economic slowdown drove Wall Street, previously seen as a safe haven, to its steepest one-day drop in nearly four years on Friday.

While China took the spotlight, analysts pointed to other bearish fundamental factors at play.

“On the surface it would be easy to point the finger at slowing China growth, falling oil prices and emerging market currency wars as the reason why global equity markets have fallen sharply through the summer,” wrote Sean Darby, chief global equity strategist at Jeffries.

“However, a mix of disinflation and deflation forces, a tightening in global monetary conditions and deteriorating profits in emerging markets are much greater factors.”

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First posted: 12:28 p.m.

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