A punishing week has left global stock markets nursing losses of more than $2tn in the first week of the new year after worries about China’s faltering growth and turmoil on its stock exchanges reverberated around the world.
Almost £85bn was wiped off the FTSE 100 in its worst opening week to a year since 2000, when the dotcom bubble burst. The blue-chip index closed at 5,912.44 on Friday, down 0.7% on the day and 5.3% on the week.
Repeating the pattern of last summer, sharp drops on the world’s biggest stock exchanges mirrored plunging shares in China, where fresh signs of economic weakness and the prospect of a ban on share sales by major stakeholders being lifted had sparked a wave of selling by smaller investors.
Moves in China’s yuan currency, which authorities allowed to weaken in an apparent attempt to bolster flagging exports, heightened alarm about the state of the world’s second-biggest economy. Beijing mustered what analysts called its “national team” to intervene and boost the yuan on Friday, offering some brief respite to markets in China and beyond.
But the mood remained cautious and gains on European exchanges were short-lived. Stock markets in Germany, France and the UK all finished sharply lower over the week, the pan-European FTSEurofirst 300 index had its worst week since 2011.
In a choppy trading session on Wall Street, shares were boosted by news of stronger- than expected US jobs growth in December, but then pared gains as traders fretted about further interest rate hikes and the tough global economic outlook.
With just hours to go to the closing bell in the US, global markets looked on course to have rung in 2016 with trillions of dollars of losses. By Thursday’s US close, global stock markets had lost $2.23tn since the start of the year based on the S&P Global Broad Market index (BMI). The losses amounted to “more than the estimated US student loan debt and 12% of the US debt,” noted Howard Silverblatt, senior index analyst at S&P Dow Jones indices.
There were also sharp moves on commodity markets. The prospect of weaker global growth coupled with a supply glut pushed the price of crude oil to its lowest level for almost 12 years.
The price of Brent crude, the global benchmark, had risen more than 2% on Friday after China sought to boost the yuan, and its stock exchanges abandoned a new “circuit breaker” mechanism that had been blamed for much of the stock market havoc. But echoing the see-saw pattern in stock markets those gains were later erased and Brent was trading at about $33 a barrel, near a low hit in 2004.
With worries about a global downturn intensifying, investors off-loaded riskier shares and flocked to so-called safe haven assets such as gold and government bonds.
“So much for the new year bringing some relief to the markets” said credit strategists at the French bank Société Générale. “Worries about China, the endless drop in oil prices and even new geopolitical tensions pounded the markets, punishing risk assets with a flight to quality that was in full swing,” they wrote in a research note entitled “What’s the Chinese for ‘ouch’?”
Chinese stock markets were suspended twice in a week after 7% falls tripped a new circuit breaker mechanism. It had been intended to stem sharp sell-offs but in the end appeared to have the opposite effect and in a dramatic U-turn the mechanism was withdrawn just days after it had been introduced.
Chinese stocks recovered by 2% on Friday after the yuan edged higher following days of depreciation that had spooked investors and fuelled capital flight out of the country.
Jasper Lawler, market analyst at CMC Markets, said: “China’s removal of counter-productive circuit breakers, state buying and a rise in the yuan helped prevent another stock market rout and alleviated concerns that the central bank would continue the rapid devaluation of the currency.”
After a day of wild trading, the Shanghai composite index and the CSI 300, which comprises the biggest stocks from the Shanghai and Shenzhen stock exchanges, finished about 2% higher, at 3,186.78 and 3,361.56, respectively. Hong Kong’s Hang Seng added 0.6%.
The latest bout of stock market turmoil presents a major challenge to the Chinese president, Xi Jinping, who has portayed himself as the country’s top economic steward, ahead of the prime minister, Li Keqiang.
Xi was reportedly livid over a humiliating stock market debacle in mid-2015, lambasting senior economic officials after he appeared on the front cover of the Economist fighting to prop up Chinese shares.
Experts say the credibility of Beijing’s economic policymakers has been further damaged by the latest turmoil. The Japanese finance minister, Taro Aso, questioned whether Beijing could afford to keep supporting the yuan in light of its record decline in foreign reserves last month.
Christopher Balding, a professor of finance and economics at Peking University’s HSBC business school, said Beijing’s economic flip-flopping and “wild swings in policymaking” had severely damaged confidence.
“Chinese investors want very similar things that international investors want: they want clarity, they want to understand what is going on, they want to know what the policies are, they want stability and [to know] what the rules are,” he said.
“The constant back-and-forth and changes just don’t engender confidence that Beijing has really any idea what they are doing.”
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