Panic in global markets: China sinks, the dollar tumbles

Many traders had hoped Beijing would take support measures, such as an interest rate cut, over the weekend after China’s main stocks markets slumped 11 percent last week.

The Dow Jones industrial average was down 346.07 points, or 2.10 percent, at 16,113.68.

Friday’s wave of selling culminated with the S&P 500 losing almost 6% for the week in its worst weekly slump since 2011.

European stocks and U.S. stock futures fell sharply as a rout in Chinese shares gathered pace, wiping out gains for the year. Oil prices fell by around 4%, while investors headed for relatively safe assets such as U.S. government bonds.

It’s no secret that China’s economy has been slowing and its stock market has been staggering since June.

High-yield bonds have been falling in prices since China devalued its currency two weeks ago.

The Shenzhen is still up around 33% this year (down around 7.6% on the day), but it is falling from much higher than the Shanghai Composite. Japan’s Nikkei benchmark tumbled 4.6%.

Still, the lack of official action over the weekend spooked investors Monday morning.

Investors will be looking to China’s next move after The Wall Street Journal reported that the central bank is preparing to flood the banking system with liquidity to boost lending.

The pan-European Stoxx Europe 600 closed 5.3% lower, the biggest one-day decline since December 2008. The index is now up by just over 2% this year, as a massive rally sparked by the European Central Bank’s stimulus program melts away.

The firm is more cautiously positioned, with more cash in its portfolios, than at any time in the last four years, Mr. van Nieuwenhuijzen said.

Mining stocks, which are highly sensitive to fears of waning Chinese demand, bore the brunt of the selloff.

The speed of the recent selloff has left investors nervous.

“I wouldn’t expect something like the financial crisis of 1997, but if China has a hard landing and growth is weak for years, that could cause problems for Asia”, Biswas added.

There was further evidence that developed markets were becoming synchronised with the troubles.

The turmoil in markets will likely complicate the Federal Reserve’s plans to raise interest rates this year.

“We are in the midst of a full-blown growth scare”, strategists at JP Morgan Cazenove said in a note.

A Fed rate rise in September would be “a very courageous call”, he said. The Japanese and European common currencies have recently tended to climb in times of market stress.

The US currency came under additional pressure as Treasury yields extended their decline on safety buying alongside the slide in equities. The euro soared to a six-and-a-half month high of $1.1496.

Spot palladium dropped 2.4% to $588/oz and platinum was down 2.1% at $994.75.

However, commodity-linked currencies fell sharply against the dollar despite the buck’s broader weakness. Russia’s ruble slumped 2.5% to trade at around 71 against the dollar.

The Malaysian ringgit hit a 17-year low.

Economies throughout Asia and the rest of the developing world have become dependent on China’s demand for their exports of minerals, timber, energy resources and other commodities. US crude was last down 3.3 percent at about $39 a barrel while Brent dropped to $43.60 barrel to take it under January’s lows for the first time.

The key economic events for this week will be the Q2 GDP data for Germany, the UK and the U.S. along with Jackson Hole meeting. The crude oil price has broken its 40 dollar level and now all eyes are towards the 35 dollar handle.