A 4 per cent drop in Chinese shares dealt reeling world stock markets a fresh blow on Friday, as nerves about rising borrowing costs and soaring volatility put them on course for their worst week since the height of euro zone crisis.
European bourses saw relatively minor early losses but China’s overnight plunge had gouged at confidence again after the second 1,000 point loss of the week for the US Dow Jones Industrial had sent it into official correction territory.
Capital flow figures also showed a record $30 billion had already been yanked out of stocks during the rout, though 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,” said JP Morgan Asset Management Global Market Strategist Kerry Craig. “But given that US markets are now in correction territory – with a 10 per cent drop since the market peak in January – it’s likely that the most severe gyrations will hopefully have passed,” he added as US futures turned higher.
The yield on benchmark 10-year US Treasuries, which tends to be the driver of global borrowing costs, was hovering at 2.86 per cent just short of both Thursday peak and Monday’s four-year high of 2.885 per cent.
Europe’s mainstay – German Bunds – were barely budging too at 0.70 per cent, 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.
On top of pressure from the drop in global shares, Chinese equities had also been hurt by traders closing positions ahead of the Lunar New Year holidays which begin next week. The Shanghai Composite Index had tumbled as much as 6.0 per cent to its lowest since May 2017, and the blue chip CSI300 index dived as 6.1 per cent. Both indexes had pruned the losses to just over 4 per cent by the time they closed, but it was still their largest single-day losses since February 2016.
Japan’s Nikkei had also shed 2.3 per cent, en route to a weekly loss of 8.1 per cent – its biggest since February 2016 too. For MSCI’s broadest index of world shares, the 47-country ACWI the slump was 6.2 per cent, which as long as it is still more than 6.1 per cent when US markets close later will be the biggest loss since September 2011. At that point markets where being slammed by worries about Greek debt default and a collapse of the euro zone. The Federal Reserve was also starting one of its mass bond buying programmes.
-ReutersTags: Bank Of England, Business, Donald Trump, Federal Reserve, Frank Benzimra, Jerome Powell, Markets, Masahiro Ichikawa, Nikkei, Societe Generale, Sumitomo Mitsui, The Us Government, Us Senate, Yoshimasa Maruyama