Reeling world stock markets took another blow yesterday, when Chinese shares sank 4 percent, as concern about rising borrowing costs and soaring volatility put them on course for their worst week since the height of the eurozone crisis.
Losses on European bourses accelerated and volatility rose after a modestly lower open.
China’s drop ripped up market confidence again after a second 1,000-point loss this week on the US Dow Jones Industrial Average, putting it officially into correction territory.
Capital flow figures also showed a record US$30 billion had already been yanked out of stocks during the rout, but even after that, Bank of America’s closely followed “Bull & Bear” indicator was still flashing “red” and warning investors to sell.
“After the moves earlier this week market investor sentiment is fragile, and because of this we aren’t expecting the markets to immediately start moving higher once again,” JPMorgan Asset Management Global Market Strategist Kerry Craig said. “But given that US markets are now in correction territory — with a 10 percent drop since the market peak in January — it’s likely that the most severe gyrations will hopefully have passed.”
US futures were up 0.7 percent early in the European trading day, but fell back by 12 noon GMT. Dow Jones futures were last down 0.1 percent, while S&P 500 futures edged up 0.1 percent.
The main gauge of European stock volatility extended hit its highest level since June 2016, when the Brexit vote sent markets spiralling.
However, implied volatility on the S&P 500 was calmer, falling back slightly ahead of the US open.
There was limited reaction as the US government staggered into another shutdown after lawmakers failed to meet a funding deal deadline, but it did play into many of the overarching market concerns this month.
The yield on benchmark 10-year US Treasuries, a driver of global borrowing costs, was hovering at 2.84 percent, just short of Monday’s four-year high of 2.885 percent.
Europe’s mainstay — German Bunds — were barely budging too at 0.74 percent, as their recent rise in yields left them flirting with another weekly rise, which would mark their longest run of weekly gains in 16 years.
Higher yields are seen hurting equities as they increase loan costs for companies and ultimately consumers. They also present an alternative to investors who may reallocate some funds to bonds from equities.
Chinese equities were hurt by the drop in global shares and by traders closing positions before the Lunar New Year holiday starting next week.
The Shanghai Composite Index had tumbled as much as 6 percent to its lowest since May last year and the blue-chip CSI300 index dived 6.1 percent.
Both indices pruned the losses to just more than 4 percent by the time they closed, but still had their largest single-day losses since February 2016.
Frank Benzimra, head of Asia equity strategy at Societe Generale in Hong Kong, said he was neutral on China equities due to valuations on Chinese consumer-related industries.
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