Hopes of a New Year rally were shattered yesterday as fears over the health of the Chinese economy wiped trillions from stock markets and sparked concern of more turmoil to come.
Investor confidence was further hampered by rising tensions in the Middle East as Saudi Arabia and its allies cut ties with Iran, accusing the country of “increasing, flagrant and dangerous meddling”.
Impending strife in the region sent crude oil prices up briefly by four per cent before they fell back to around $37 a barrel.
In China, weak manufacturing data sparked a seven per cent decline in the blue-chip CSI 300 index, triggering circuit-breakers and bringing a halt to daily trading across Chinese stock markets. The breakers kick in when the market falls by five per cent.
The gloom in China dashed hopes for a strong start to the year after a disappointing run-up to Christmas.
Mark Williams, Capital Economics’ chief Asia economist, told City A.M.: “The bigger picture shows China’s market will remain volatile for the foreseeable future.”
The market capitalisation of listed firms around the world tumbled by $700bn (£476bn) according to the S&P Global 1200 index, while the value of shares in China’s 300 largest companies fell by nearly $230bn.
The blue-chip FTSE 100 had its worst first day of trading of a new year since 2000, seeing £38bn wiped off, eventually closing down 2.5 per cent at 6,093.43.
Elsewhere in Europe, the German Dax index fell more than four per cent, while France’s Cac 40 index was 2.6 per cent lower.
Meanwhile, US markets were also weighed down by the country’s latest manufacturing data, showing factory activity contracted in December at the fastest pace in more than six years.
The Dow Jones industrial average ended the day with its largest percentage decline on the first trading day of the year since 2008.
Spooked investors piled into the relatively safe havens of sovereign bonds and gold, as fears mounted that last year’s troubles will continue into 2016.
Gold jumped more than 1.5 per cent through the day, while benchmark US Treasury yields, that fall as prices rise, hit two-week lows.
Experts are warning the volatility could go on all week as markets adjust ahead of the lifting of a six- month trading ban on Chinese institutional investors selling more than five per cent of shares on Friday.
The ban was put in place by China’s securities regulator in July to fend off a market rout that wiped $3 trillion from the value of Chinese companies in as little as a month.
“It’s going to be a bumpy ride this week,” Mark Dampier, head of investment research at Hargreaves Lansdown, told City A.M.
The circuit breaker measures, first used yesterday and put in place by Chinese authorities to try to calm swings in the stock market, have been blamed for potentially inflaming volatility.
Mike van Dulken, head of research at Accendo Markets, said: “Triggering of a circuit breaker fuels panic. People then never know how low it could go and they all bolt for the exit.”