The FTSE 100 had a sorry start to the new year with £34bn wiped off leading shares after more weak figures from China fanned fears the global economy was slowing.
News of weakness in China’s vast factory sector sent Chinese shares tumbling 7%, forcing trading to be halted. The sell-off and share suspension sent jitters around global markets as traders returned from the Christmas break and the FTSE 100 lost more than 2%, or 133 points, in morning trading, falling to 6,108.
“Anyone hitting the trading floor expecting a calm and quiet start to 2016 was given a rude surprise as Asian chaos affected European markets,” said Alastair McCaig, market analyst at IG online trading company.
“This swift return to the 2015 template of worrying about China looks to have been the trigger for the selloff in Chinese equities. It is the first time Chinese regulators have activated the suspension in trading as a circuit breaker safety measure. Starting the year off by suspending trading an hour and a half early on the back of a 7% fall has set an ugly precedent for the year ahead.”
The drop in Chinese stocks followed a business survey that suggested manufacturing activity contracted for the 10th successive month in December and at a faster pace than the previous month. An official survey of the factory sector last week also pointed to a further slowdown in December, adding to worries that the world’s second-largest economy will slow further and put further pressure on global growth.
In the UK there were further signs of weakness for manufacturers, with a survey appearing to confirm 2015 was slower than 2014. The year closed on a sluggish note, defying City expectations for a small bounce-back in December.
As British manufacturers fret about the effects of a strong pound and waning demand from overseas, new orders came in at the slowest pace for five months, according to the latest Markit/Cips purchasing managers’ index (PMI).
“The UK manufacturing sector ended 2015 on a disappointing note, with its rate of growth slowing further from October’s recent high back down towards the stagnation mark. This suggests that industry will make, at best, only a marginal positive contribution to broader economic growth in the final quarter of the year,” said Rob Dobson, senior economist at Markit survey compilers.
Manufacturing PMI slips
The report’s main activity index slipped to 51.9 in December from 52.5 in November. It was above the 50-mark that separates growth from contraction but undershot forecasts for a reading of 52.7 in a Reuters poll of economists.
The business survey painted a slightly brighter picture than official figures, which showed manufacturing was in recession last year.
The PMI was also more upbeat on job prospects at manufacturers than other indicators. The survey suggested employment rose again in December, with increases across the consumer, intermediate and investment goods sectors and at small and large companies alike.
In contrast, EEF, the manufacturers’ organisation, predicted tens of thousands of jobs will be lost from the factory sector this year as it battles a tough export market, the fallout from steel plant closures and a collapse in demand from the North Sea oil industry.
Surveys from manufacturing in the eurozone, however, showed business picked up in December. The purchasing managers’ index for the single currency bloc came in at 53.2 in December, according to Markit. That was just above the 53.1 initial estimate, and 52.8 recorded in November.
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