China sneezes, world catches cold

Hong Kong: Chinese stocks nosedived Thursday, triggering their second daylong trading halt this week and dragging down global markets, Asian currencies and oil prices as investors fretted about the world’s No. 2 economy.

The Shanghai Compo-site Index tumbled 7.3 per cent to 3,115.89 bef-ore “circuit breakers” suspended trading for the day. The Shenzhen Composite Index for China’s second smaller stock exchange slumped 8.3 per cent to 1,955.88. Major European indexes dropped around three per cent while Wall Street opened sharply lower. Measures introduced by the Chinese government last year to prop up share prices after a meltdown in June are being gradually withdrawn, leading to volatile trading. Investors are also unnerved that Beijing has allowed the yuan currency to weaken, a possible sign the economy is in worse shape than thought.

Angus Nicholson, market analyst at IG in Melbourne, Australia said the sell-off this week only underlines that the Chinese government’s intervention last year to support the market had delayed the inevitable slump. “Many people are asking how far Chinese equities could fall,” he said in a market commentary. “The great concern for global markets is that the dramatic pace of the currency devaluation seems to indicate a far greater weakness in the Chinese economy than is easily perceivable in its publicly released statistics,” Nicholson said.

The latest slump comes after China’s government guided the yuan lower over several days, even as its foreign currency reserves, the world's largest, posted their biggest annual drop on record in 2015. Foreign exchange reserves fell $512.66 billion in 2015 to $3.33 trillion, adding to worries about growing capital outflows that are dragging its yuan currency to multi-year lows. Nearly two-thirds of the year’s drop came between August and December, hinting at the scope of the central bank’s attempts to stabilise the yuan after its surprise devaluation of the currency on August 11 panicked markets.

“The larger than expected drawdown on reserves ... indicates that long-term intervention is unsustainable,” which will likely lead to further falls in the yuan which in coming days, said Chester Liaw, an economist at Forecast Pte Ltd in Singapore. Many economists worry that the rapid fall in forex reserves has  effectively drained more liquidity from the Chinese banking system.

Oil falls, gold gets back shine:

Oil fell below $33 a barrel on Thursday for the first time since April 2004 as a fall in Chinese shares rattled investors already concerned by near-record production and massive stockpiles of unwanted crude and refined products. Oil prices have fallen by around 70 per cent since mid-2014, hurting oil companies and governments that rely on crude revenue. “Negative sentiment is hurting demand expectations, growth is easing in China and there is a spillover from the inventory build in US stocks from yesterday and this is reflected in prices,” said Hans van Cleef, senior energy economist at ABN Amro in Amsterdam.

The rapid fall has made a prediction that Goldman Sachs made last year that crude could fall as low as $20 per barrel seem less outlandish than it then seemed. Meanwhile, gold is reaping the benefit of uncertainty in stocks and crude oil, with investors shifting to the traditional safe haven. Globally, gold clim-bed above $1,100 an ounce for the first time in nine weeks as the dollar fell.

In Mumbai, standard gold (99.5 purity) climbed by Rs 310 to settle at Rs 25,960 per 10 grams from Wednesday's closing level of Rs 25,650. Pure gold (99.9 purity) also gained by a similar margin to end at Rs 26,110 per 10 grams as compared to Rs 25,800 earlier.

Sensex dips to 52-week low:

The Sensex tanked to its 52-week low in the intra-day trade before ending the day at 24,851.83, tanking 554.50 points or 2.18 per cent, wiping out Rs 2.45 lakh crore of investor wealth. “Global investors fear that the competitive devaluation of yaun may lead to lower product prices, which is expected to impact corporate earnings and manufacturing growth in many parts of the world,” said Gopal Agrawal, chief investment officer, Mirae Asset Global.

While experts feel that high bouts of volatility would be a permanent feature of equity markets in 2016, experts said investors should learn to take advantage of such sharp swings in the market. “What we saw in the Indian markets was an overreaction to the developments happening in the global markets. Fundamentally, we are in a strong position at the moment and I expect more number of investors coming into our markets in coming days, which will help our markets to post impressive returns going ahead,” said Deven Choksey, managing director, K.R.Choksey Securities. 

He added that portfolio money invested in the Chinese equity markets are likely to flow into India going forward and investors should look at quality stocks across se-ctors for better returns. “It will be a stock specific market in 2016. Inste-ad of getting influenced by the movement of stock indices, investors should look at quality stocks,” he added.

“The markets are now trading near its 52-week low. Instead of selling in panic, I think investors should hold on to their large cap stocks,” said Rikesh Parikh, vice-president, market strategy at Motilal Oswal Securities. With the Chinese stock market regulator on Thursday announcing several measures to restore stability in the market, U.R Bhat, managing director, Dalton Capital  feels that the domestic equity markets could see some bounce back on short covering.