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China leads plunge in global equities; emerging market currencies hit new lows

China’s equity markets saw their biggest one-day drop since 2007 on Monday with the Shanghai SE Composite index closing 8.5% lower. Today’s losses have wiped out the stock market’s gains since the start of the year, though shares do remain around 40% higher than 12 months ago. The lack of any intervention or announcement of new stimulus measures by Chinese authorities over the weekend exasperated the mood of panic in the markets.

Shares in other Asian markets also saw big falls, with Japan’s Nikkei 225 index down 4.6%, Hong Kong’s Hang Seng down 6.6% and Sydney’s All Ordinaries index down 4%. In Europe, stocks extended Friday’s losses and the Dow Jones’ 3.1% slump on Friday further weighed on market sentiment. London’s FTSE-100 slumped over 2% after its open, coming dangerously close to breaching the 6000 level. France’s CAC40 also tumbled over 2%, briefly dropping below the 4500 level, while Germany’s Dax dropped below the 10000 mark to its lowest level since January. The Dax has now moved further below the 200-day moving average after dipping below it in mid-August, potentially signalling the start of a longer-term bear market. The US’s S&P 500 has also seen a similar sharp fall below the 200-day moving average.

Investors are now hoping that the People’s Bank of China will soon announce further easing of monetary policy by cutting interest rates and lowering the reserve ratio requirement (RRR) for banks. Cuts in interest rates totalling 0.75% and three reductions in the RRR so far this year have had only a limited impact on preventing a deepening slowdown. Chinese authorities had also intervened via the state-backed China Securities Finance Corp. in purchasing stocks to prop up share prices.  But this only provided a short-term boost and share prices have now reversed their gains after the rebound.

Speculation is mounting as to what measures China’s government will announce next. The surprise devaluation of the yuan in August triggered panic in global markets, despite the small scale of the depreciation, as it signalled the acknowledgement by Chinese authorities of the depth of the slowdown in China’s economy.

The yuan’s devaluation has had a knock-on effect on other emerging market currencies, which have fallen to levels not seen since the Asian financial crisis of 1997-98. The Malaysian ringgit and the Indonesian rupiah have both fallen to 17-year lows at 4.2580 per dollar and 14,044 per dollar, respectively. At the same time, other Asian countries such as Vietnam and Kazakhstan have followed China’s lead in devaluing their currencies to stay competitive.

But currencies outside Asia have also come under intense pressure. The South African rand has hit a 14-year low of 13.66 per dollar on plummeting commodity prices, which has hit its mining sector. The Turkish lira hit an all-time low of 3 liras per dollar on Thursday as Turkey battles political uncertainty, hindering further economic reforms. Meanwhile, the Russian rouble, currently at 71.20 per dollar, is fast approaching its December/January lows as oil prices head for fresh 6-year lows.

Safe-haven currencies such as the yen have gained sharply against the dollar, which has been falling as investors lower their expectations of the Federal Reserve raising interest rates in September. Many believe the Fed is unlikely to risk destabilizing the markets further by raising interest rates at a time when inflation poses little threat. The dollar has fallen to 120.60 yen, its lowest level since July 9. The euro has also been rallying against the dollar, reaching February highs of 1.1499. While safe-haven government bonds such as German bund yields have fallen to their lowest level since June and gold prices have rallied to near 7-week highs of $1168.

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