China late Thursday removed the “circuit breaker” mechanism blamed for fuelling sharp sell-offs that shuttered mainland markets early twice in the space of four days, provoking losses on trading floors from Asia to Europe and the Americas.
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For the day, the Dow Jones industrial average fell 167.65 points, or 1.02 percent, to 16,346.45, the S&P 500 lost 21.06 points, or 1.08 percent, to 1,922.03 and the Nasdaq Composite dropped 45.80 points, or 0.98 percent, to 4,643.63.
Despite the relative calm in China and a strong U.S.jobs report, the Dow fell 168 points on Friday, while the S&P 500 and Nasdaq lost about 1% apiece.
The major indexes closed out the week with losses of almost 6 percent or more, their worst since 2011. The Dow has had its worst start to a year on record. USA crude dipped 11 cents to $33.16 a barrel in NY and Brent crude, a benchmark for worldwide oils, lost 20 cents to $33.55 a barrel in London.
So-called circuit breakers, which are created to stop prices from free-falling by putting a halt on trades, were introduced to the Chinese stock market for the first time on Monday of this week. But here’s the key point: China must let market forces determine the currency price and, by the way, the level of stocks. The effect was a rush to sell before a second trigger halted the day’s trade permanently.
Authorities also set the central rate for the yuan currency marginally higher against the United States dollar on Friday, ending eight days of falls.
Wall Street initially responded favorably to the latest evidence that the USA economy continues to chug along despite the global turmoil. Economists were expecting the yuan to decline as China’s economy weakens but what’s come as a shock are a few sudden movements over the past half year.
Fredericks said the low wage growth and limited inflation will make the Federal Reserve proceed cautiously as it raises interest rates.
“So much for the new year bringing some relief to the markets” said credit strategists at the French bank Société Générale. The decline in China’s cash pile concerns investors because it tells them that capital outflows are accelerating, which puts downward pressure on the currency and increases the need for the central bank to step in and support the yuan. JPMorgan Chase lost $1.35, or 2.2 percent, to $58.92 and Citigroup fell $1.43, or 3 percent, to $46.13.
“Investors are nervous of economic slowdown and after losing all the gains we saw in the year to August 2015 the Chinese authorities are trying to prop up the markets with various artificial measures”.
The government said it was merely responding to signals from the market: The yuan, closely linked to a surging USA dollar, had risen too high.
The offshore yuan was last at 6.6727 to one US dollar, strengthening from a five-year low of 6.7511 Thursday. The unemployment rate was unchanged at 5 percent.
Foreign investors have limited ownership of Chinese stocks because the country’s financial system is still largely fenced off from the world.
Australia’s S&P/ASX 200 Index declined 0.6 percent and New Zealand’s S&P/NZX 50 Index fell 1.5 percent. The prospect of weaker global growth coupled with a supply glut pushed the price of crude oil to its lowest level for nearly 12 years.
American financier George Soros warned that China’s flagging economy and subsequent devaluation of its currency were undermining financial stability in ways reminiscent of the global crisis of 2008.
Goldman Sachs said in a note on Friday the market needs to see sustained low prices through the first quarter and that producers were not ready to slash output at current prices.
Traders are indeed more concerned near-term, with the spot price of the CBOE volatility index.VIX higher than futures three months down the line VXc1.
The price of gold fell $9.90, or 0.9 percent, to $1,097.90 an ounce.
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“I think we’re in a pretty skittish environment here where anybody who wanted to sell (would) wait for a bit of a pop”, said Ben Pace, CIO at HPM Partners.
