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China turmoil wipes out 2015 market gains in just five days

A brutal market sell-off sparked by fresh fears over China has wiped out all out last year's gains in a single week, as our Accumulator table shows.


by Daniel Grote on Jan 08, 2016 at 13:04

China turmoil wipes out 2015 market gains in just five days

What a torrid start to the year. The brutal market sell-off sparked by fears over China has led to global stock markets wiping out all of 2015's gains in the space of just five days.

While some markets weathered China's troubles marginally better than others, all fell heavily into the red, as our exclusive Accumulator data table shows. That left the FTSE World 4.1% down over the five days to yesterday, wiping out almost all of 2015's 4.3% gain for global shares.

It was a return of familiar Chinese themes from last year which conspired to banish any New Year optimism among investors.

Poor economic data, weakening currency and a volatile stock market in the world's fastest-growing economy led to renewed fears of a slump in global output.

China's Shanghai Composite fell a whopping 12% over the week, a bigger loss than even the 10.6% fall registered in the week of Black Monday last year.

While the data from China has been bad, with the last week bringing news of a fresh slump in manufacturing activity and disappointing performance of the country's services sector, the dynamics of the China's stock market haven't helped matters.

China meddles with market

The Shanghai Composite index is dominated by retail investors, some of whom have borrowed in order to invest, which is almost a recipe for volatile trading. And regulatory meddling with the market hasn't helped much either.

One of the major catalysts for this week's China sell-off was the imminent expiry of a ban on share sales by large investors. That was due to lapse today, until authorities sought to extend it in a desperate bid for calm, and had led to investors bailing out of their positions ahead of what they feared could have proved an even more brutal sell-off.

Then there was the country's controversial 'circuit breaker' mechanism, which suspends the day's trading when the market falls by 7%, and was triggered twice this week. Far from placing a limit on losses, the rules appeared to be encouraging a scramble to sell, and have been scrapped as quickly as they were introduced.

Hong Kong's Hang Seng index was badly hit by China's troubles, down 6.2%, while emerging markets took another tumble, as the devaluation of the yuan sparked fresh falls among the beaten-up currencies of developing economies. The MSCI Emerging Markets index was down 5.9%, Asia Pacific shares, excluding Japan, fell 6.1% and Brazil, which has enough troubles of its own to contend with apart from the China threat, dropped 6.5%.

Germany's DAX 30 was also hit particularly hard, down 6.3%. China is the world's biggest buyer of German cars, and the country's problems weighed on the shares of BMW (BMWG.DE), Volkswagen (VOWG_p.DE) and Daimler (DAIGn.DE).

Oil in freefall

In any other week, oil's spectacular fall would be dominating the headlines. It's down 7% over the five days to yesterday, having earlier this week reached $32.18 a barrel, its lowest price in 11 years. The dispute between Saudi Arabia and Iran has made any output cut look less likely, while the rally in the dollar, in which crude is priced, hasn't helped.

Where investors have been spared the heaviest of losses, currency has played its part. The pound fell to a five-and-a-half-year low against the dollar this week and has also suffered against the euro and yen. The flight to the perceived safe haven of the dollar amid the market volatility, the contrast between the interest rate outlook in the US and the UK, and fears over a 'Brexit' have all weighed on sterling.

This has helped to boost the returns for sterling investors in the US, Japan and Europe, helping to explain the relatively moderate 2.9% loss for UK investors in the Topix.

While it's been a grim week for stock markets, not all investors have lost money. Gold and silver have surged, up 5.1% and 4.6%, as investors flocked to the safe haven assets, while bonds are also up.

So far, fixed income is doing what it's supposed to do: rising when stock markets fall. Some investors had questioned whether that historical relationship between bonds and shares had started to become unstuck, after bonds and shares fell in unison during the financial crisis, then both rose on a tide of quantitative easing-driven easy money.

It may serve as scant consolation after the week we've had, but it's the best positive markets can throw up at the moment: at least not everything is falling.

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