European stocks plunged on Monday and American futures fell more than 1% after a fresh sell-off in China shaved nearly 7% off the Shanghai Composite Index.
Heightened geopolitical tensions between Iran and Saudi Arabia over the execution of prominent cleric Nimr al-Nimr weighed on investor sentiment in the first trading day of the year. Saudi Arabia severed its diplomatic mission to Iran over the weekend after Iranian protesters stormed the Saudi embassy in Tehran. Saudi allies Bahrain, the United Arab Emirates (UAE) and Sudan have also reportedly severed diplomatic ties with Iran.
Chinese stocks experienced their worst rout since the August 2015 market crash, undoing months of regulatory work by the central bank to restore stability. China’s Shanghai Composite Index plunged 242.92 points or 6.9% to 3,296.26, the lowest level since October 14. The CSI 300 Index of the largest companies listed in Shanghai and Shenzhen fell 261.94 points or 7% to 3,469.07.
Meanwhile, Hong Kong’s Hang Seng Index also fell 587.28 points or 2.7% to 21,327.12.
Elsewhere in Asia, Tokyo’s Nikkei 225 Index declined 582.73 points or 3.1% to 18,450.97, the lowest level since October 22.
The rout in Chinese stocks was also influenced by an unexpected slowdown in the country’s manufacturing sector. The Caixin China general manufacturing PMI fell to 48.2 in December from 48.6 the previous month, confounding expectations for an increase to 49.0. A reading below 50.0 signifies contraction in the economy.
The decline in headline PMI “shows that the forces driving an economic recovery have encountered obstacles and the economy is facing a greater risk of weakening,” according to Dr. He Fan, chief economist at Caixin Insight Group.
“More fluctuations in global markets are expected now that the U.S. Federal Reserve has started raising interest rates. The government needs to pay more attention to external risk factors in the short term and fine-tune macroeconomic policies accordingly so the economy does not fall off a cliff,” he added.
Chinese volatility extended into Europe on Monday, with the pan-European STOXX 600 Index falling 2.5%. Germany’s DAX plunged around 4%. London’s FTSE 100 and France’s CAC were also down more than 2%.
American stock futures also declined sharply ahead of the opening bell. The Dow Jones index future was down 316 points. The S&P 500 mini also fell more than 35 points.
The Dow Jones Industrial Average and Nasdaq Composite Index were down more than 2% after the opening bell on Monday. The S&P 500 also fell around 1%.
Based out of Toronto, Canada, Husni Sam Borji is senior macroeconomics analysts who contributes regularly to TradersDNA, where he examines the global financial markets. Husni Sam has authored dozens of government reports and industry whitepapers, as well as thousands of financial articles. Husni Sam holds a BA from the University of Windsor and a Master’s degree in Economic Public Policy from McMaster University.
His expertise includes macroeconomics, fundamental analysis, industry research and global political economy.