Sunday 4 December 2016

European shares tumble as China suspends stock market

Published 07/01/2016 | 07:59

Investor look at an electronic board displaying share prices at a securities exchange house in Shanghai, China, on Friday, Sept. 18, 2015. China's stocks headed for the steepest weekly loss this month in shrinking turnover amid growing concern government measures to support the world's second-largest equity market and economy are failing. Photographer: Qilai Shen/Bloomberg
Investor look at an electronic board displaying share prices at a securities exchange house in Shanghai, China, on Friday, Sept. 18, 2015. China's stocks headed for the steepest weekly loss this month in shrinking turnover amid growing concern government measures to support the world's second-largest equity market and economy are failing. Photographer: Qilai Shen/Bloomberg

European shares fell sharply on Thursday after China accelerated the depreciation of the yuan, sending currencies across the region reeling and domestic stock markets tumbling.

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The pan-European FTSEurofirst 300 index and the euro zone's blue-chip Euro STOXX index both fell 2 percent. Germany's DAX declined 1.4 percent, while Britain's FTSE 100 weakened by 1.6 percent.

The People's Bank of China (PBOC) again surprised markets by setting the official midpoint rate on the yuan, also known as the renminbi (RMB), at 6.5646 per dollar, the lowest since March 2011.

Stock markets in China, which is the world's second-biggest economy and the leading global consumer of metals, were suspended for the rest of the day less than half an hour after opening as a new circuit-breaking mechanism was tripped for the second time this week.

Investors have expressed fears that the yuan's rapid depreciation could mean China's economy is even weaker than had been imagined.

"The extent of the slowdown in China is certainly a worry. Investor sentiment is very fragile at the moment," said Terry Torrison, managing director at Monaco-based McLaren Securities.

Shanghai shares tanked more than 7pc and trading was halted as the fall triggered a circuit breaker, despite recent supportive measures announced by Chinese authorities.

MSCI's broadest index of Asia-Pacific shares outside Japan dropped 1.4pc, hitting its lowest level since late September.

Japan's Nikkei shed 1.5pc. Australian shares lost 1.5pc and South Korea's KOSPI fell 0.7pc.

Fears for the health of the Chinese economy, reflected recently in a sharply lower yuan, have become a key topic worrying investors so far in 2016.

Shares in Asia extended losses after the People's Bank of China (PBOC) set the yuan midpoint rate at 6.5646 per dollar prior to the onshore market open, 0.50pc weaker than the previous fix 6.5314. It was the biggest fall between daily fixings since August and the eighth day in row for the PBOC to set a lower guidance rate.

Offshore yuan fell to a fresh record low since trading started in 2010 before trimming a chunk of its losses on suspected intervention, but this did little to soothe sentiment.

Financial markets fear the yuan's rapid depreciation may accelerate, which would mean China's economy is even weaker than had been imagined, and could therefore spark another wave of competitive devaluations around Asia and in other key economies.

"The Chinese yuan is smack bang at the heart of concerns and much has been made of the comments in the China Securities Journal that the weakness in the CNY is not actually causing instability," wrote Chris Weston, chief market strategist at IG in Melbourne.

"This is key, and traders feel this portrays more CNY weakness to come and therefore additional strain on the global economy, not to mention corporate China."

Wall Street shares closed at three-month lows overnight amid the general risk aversion, amplified by a continuing decline in crude oil prices and geopolitical concerns following North Korea's nuclear test on Wednesday.

U.S. Treasuries gained from a consequent flight to quality. The benchmark 10-year note yield sank 9 basis points to its lowest since mid-December.

The yen, another beneficiary in times of perceived global turmoil, also attracted bids. The dollar fell to a four-month low of 117.66 yen.

The greenback was also weighed down after the Federal Reserve's December policy meeting minutes suggested further U.S. rate increases would be gradual because of concerns about persistently low inflation.

The euro was up 0.2pc at $1.0804 with the dollar on the back foot.

The Australian dollar, often used as a proxy for China-related trades, fell to a two-month low of $0.7025.

In commodities, Brent crude fell to an 11-year low of $33.41 a barrel after data showed a surprisingly big build-up of U.S. gasoline stocks, adding to fears of a growing global glut.

The crude oil market has so far shrugged off rising geopolitical risks such as the tensions between Saudi Arabia and Iran, and North Korea's nuclear test.

Reuters

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