LONDON — 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 eurozone 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 U.S. Dow Jones Industrial had sent it into official correction territory.
Capital flow figures also showed a record US$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 J.P. Morgan Asset Management Global Market Strategist Kerry Craig.
“But given that U.S. 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 U.S. futures turned higher.
There was limited reaction as the U.S. 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 that have taken hold this month.
The yield on benchmark 10-year U.S. 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.
Caution, Fragile China
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.
Frank Benzimra, head of Asia equity strategy at Societe Generale in Hong Kong, said he now was neutral on China equities due to two concerns: valuations on China-consumer related industries and execution risks on deleveraging, especially financial deleveraging.
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 U.S. 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 programs.
“The correction phase in equities could last through February and possibly into March,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management in Tokyo.
In currencies, the dollar edged up 0.2 per cent to 108.985 yen, after slipping 0.5 per cent overnight. For the week, it was on track to lose 1.5 per cent against its Japanese peer amid risk aversion in broader markets.
The Swiss franc dipped 0.2 per cent to 0.9383 franc per dollar after advancing about 0.7 per cent the previous day, while the euro was on course for its worst week against the dollar since October as it nudged up to US$1.2271.
Oil was still slippy with U.S. crude futures down 1.1 per cent at US$60.53 per barrel after hitting a seven-week trough of US$60.27 on Thursday. Brent crude fell for a sixth straight day too to 0.7 per cent to US$64.37 per barrel.
As well as all the global market uncertainty, there are signs supplies could be going up again after Iran announced plans to increase production and data showed U.S. crude output hitting record highs.
Metals took another mauling too. Bellwether industrial metal copper was on course for its worst week of the year so far having dropped back below the US$7,000 a tonne mark that had become something of a support crutch.