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Markets in free fall after China devalues yuan

Less than half an hour after the market opened, Chinese stock trading was suspended for a second time this week.

January 08, 2016 12:47 am | Updated November 17, 2021 03:00 am IST

A woman reacts near a display board showing the plunge in the Shanghai Composite Index at a brokerage in Beijing, China, Thursday, Jan. 7, 2016. Chinese stocks nosedived on Thursday, triggering the second daylong trading halt of the week and sending other Asian markets sharply lower as investor jitters rippled across the region. (AP Photo/Ng Han Guan)

A woman reacts near a display board showing the plunge in the Shanghai Composite Index at a brokerage in Beijing, China, Thursday, Jan. 7, 2016. Chinese stocks nosedived on Thursday, triggering the second daylong trading halt of the week and sending other Asian markets sharply lower as investor jitters rippled across the region. (AP Photo/Ng Han Guan)

Global shares tumbled for a sixth day on Thursday and oil prices slid to levels not seen since the early 2000s, after China guided the yuan lower and Shanghai shares tumbled by 7 per cent, igniting fears of competitive devaluations across Asia.

Less than half an hour after the market opened, >Chinese stock trading was suspended for a second time this week.

Brent crude prices skidded over 5 per cent to an almost-12-year-low of $32.16, with worries over weaker demand from China adding to a persistent drag on prices caused by oversupply and near-record output levels.

European stock markets followed Asia lower, with the pan-European FTSEurofirst 300 index down 2.3 per cent and the euro zone’s blue-chip Euro STOXX index falling 2.5 per cent.

MCCI’s 46-country All World index fell 1 per cent to hit a three-month low, the sixth straight day of losses. The benchmark emerging stock index slid 2.5 per cent to a 6 1/2-year low as investors dumped risky assets.

“It’s looking pretty ugly,” said Hedge Fund Manager and Chief Investment Officer Andreas Clenow at ACIES Asset Management in Zurich.

“We’ve been scaling down equity positions. It’s time to take a step back to re-evaluate the situation.”

The People’s Bank of China (PBOC) set the yuan midpoint rate at 6.5646 a dollar, 0.5 per cent weaker than the previous day’s fix. That was the biggest decline between daily fixings since August and the eighth day in row the PBOC had set a lower guidance rate.

Spot yuan fell to 6.5956 to the dollar, its weakest since February 2011. Offshore yuan rates hit a record low of 6.7600 to the dollar, before erasing its losses after suspected intervention by authorities. Other regional currencies followed the yuan down as markets began to worry about competitive currency devaluations from trading partners. Singapore’s dollar hit a six-year low, the South Korean won touched a four-month low, and the Malaysian ringgit slumped to a three-month trough.

Investors fear >China's economy is even weaker than had been imagined , with Beijing, in a bid to help exporters, allowing the yuan’s depreciation to accelerate.

“The lower yuan fixing probably signifies greater risks to the Chinese economy than we know of, leading to risk-off trades,” said Jeremy Stretch, head of currency strategy at CIBC World Markets.

Flight to safety North Korea’s announcement on Wednesday that it had successfully conducted a test of a hydrogen nuclear device added to a growing list of geopolitical worries for investors.

“Geopolitical tensions stemming from Saudi-Iran tensions and North Korea’s nuclear test had already heightened the ‘risk off' mood,” said Takashi Hiroki, Chief Strategist at Monex Securities in Tokyo. “Resurfacing China risk was the extra psychological blow to the markets that led to the selloff in equities.”

As investors fled to safety, the yen rose about 1 per cent to 117.615 a dollar, its strongest in 4 1/2 years.

Top-rated German bonds, which are also considered a safe haven, benefitted, too. Ten-year yields dropped below 0.50 per cent for the first time in over a month. Earlier, MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 2 per cent to its lowest since late September. Japan’s Nikkei shed 2.2 per cent.

New rules Chinese authorities introduced this week that restrict selling by large shareholders did not go down well with investors and provided little tonic to jittery markets.

“This is crazy. Chinese regulators set off on this path in July and they cannot get out of it. They have ruined whatever hope investors still had in the market,” said Alberto Forchielli, Founder of Mandarin Capital Partners in Hong Kong.

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