Shanghai index plunges 7 per cent, drags down Asian markets

The CSI300 index dipped 7 percent in afternoon trade Monday, resulting in trade being suspended for the day. Escalating tensions in the Middle East pushed up the price of oil, analysts said.

The Caixin General China Manufacturing Purchasing Managers’ Index (PMI) edged down to 48.2 in December 2015 from 48.6 in November 2015.

“The trend for the yuan to weaken is continuing in the new year as the People s Bank of China weakens the currency s fixing”, Eddie Cheung, a Hong Kong-based currency strategist at Standard Chartered, told Bloomberg News.

World stocks inched up from two-and-a-half-month lows on Tuesday as China pumped in an estimated $20bn to stabilise its equity and currency markets, which recorded the worst opening day’s trade in years in the previous session. When trading resumed, and shares continued to fall by 7%, trading was suspended altogether. “Until China stops weakening the yuan, global markets will struggle to stabilise”.

Saudi Arabia, the world’s biggest oil exporter, cut diplomatic ties with Iran on Sunday in response to the storming of its embassy in Tehran.

Saudi Arabia executed a prominent Shi’ite Muslim cleric on Saturday. Chinese companies have been borrowing in dollars hand over fist and yuan depreciation will increase their debt burdens at a time when the economy is slowing sharply. One-year dollar/Saudi riyal forwards jumped to 680 points, near a 16-year high.

Those tension prompted many investors to seek some safety in bonds.

The yen hovered at multi-month highs against its peers early on Thursday after investors snapped up the safe-haven currency as global uncertainty sapped risk appetite.

The offshore yuan’s discount to the rate in Shanghai widened to more than 1,200 so-called pips, the most since August.

Onshore, the yuan hit its lowest since April 2011, at 6.5350.

The South Korean won weakened 1.10 percent against the USA dollar, while the Malaysian ringgit declined 0.94 percent.

Meanwhile, the U.S. raised its interest rates in December and more hikes are expected in 2016.

Manufacturing surveys across the globe this week showed activity to be anemic, with China and the United States both surprising on the downside.

“It was quite unusual for the Fed to raise rates when the ISM is below 50, (which indicates contraction)”.

With short-term borrowing costs seen rising as the FOMC begins to withdraw stimulus, a reversal of this dynamic is likely to drive portfolio adjustment, sending sentiment-linked assets including stocks and higher-yielding currencies downward.