This article is more than 4 years old

This article is more than 4 years old

The FTSE 100 index had £38bn wiped off its value as global stock markets started the year with a rout sparked by fresh fears over the Chinese economy.

Investors returning after the Christmas break were greeted by turmoil on stock exchanges, with Germany’s share index posting its worst start to a new year on record and London’s FTSE 100 putting in its second-worst start. As European markets closed, Wall Street looked set for the sharpest new year losses since the 1930s.

The sell-off rippled out from China, where news of weakness in the vast factory sector and a faltering yuan sent Chinese shares on the CSI300 index tumbling 7%, forcing trading to be halted. There was further pressure on the country’s stock market as investors anticipated the end of a ban on share sales by big stakeholders this week.



The deep losses and the share suspension – which came on the first day that China’s so-called “circuit breakers” came into effect – helped send the FTSE 100 down 2.4%, or 149 points, to 6,093.

Germany’s Dax was down more than 4% and France’s Cac 40 fell 2.5%. Oil prices were also volatile as tension between Saudi Arabia and Iran sent Brent crude soaring in early trade only for prices to fall later on.

In the US, the Dow Jones industrial average had lost 2.4% by the time London markets closed. It ended the day 1.6% down, its worst opening to a new year since 2008.

“Anyone hitting the trading floor expecting a calm and quiet start to 2016 was given a rude surprise as Asian chaos affected European markets,” said Alastair McCaig, market analyst at online trading company IG.



“This swift return to the 2015 template of worrying about China looks to have been the trigger for the sell-off in Chinese equities. It is the first time Chinese regulators have activated the suspension in trading as a circuit breaker safety measure. Starting the year off by suspending trading an hour and a half early on the back of a 7% fall has set an ugly precedent for the year ahead.”

The drop in Chinese stocks followed a business survey that suggested manufacturing activity in China contracted for the 10th successive month in December and at a faster pace than the previous month.

An official survey of the factory sector last week pointed to a further slowdown in December, adding to worries that, despite a series of interventions by authorities, the world’s second largest economy will slow further in 2016 and put further pressure on global growth.

Traders said Chinese stock markets were also weighed down by investors selling shares ahead of the imminent ending of a share sales ban on listed companies’ major shareholders, which was brought in during the market crash last summer.

The oil price had a volatile session, as the signals from China, the world’s biggest energy consumer, offset traders’ predictions that tensions between Saudia Arabia and Iran could upset supply.

Brent crude turned negative in afternoon trading, down 0.4% at $37.14, having earlier added more than a dollar to $38.99 a barrel. Analysts at the consultancy Capital Economics said the tensions in the Middle East were unlikely to provide a lasting boost to oil prices.

“Ample global stocks of crude and higher production elsewhere mean that geopolitical risks from the Middle East are not as great as they once were,” they wrote in a note.

“We suspect a sustained recovery in oil prices will have to depend on production cuts outside OPEC and on signs of stronger global demand. These, rather than fresh disruption to supply from the Middle East, are the key factors behind our end-2016 forecast of $55 for a barrel of Brent.”

In the UK, China’s waning growth has weighed on confidence among exporters. There were further signs of weakness for British factories on Monday, with a survey appearing to confirm 2015 was slower than 2014. The year closed on a sluggish note, defying City expectations of a small bounce-back in December.



As British manufacturers fret about the effects of a strong pound and softer overseas demand, new orders came in at the slowest pace for five months, according to the latest Markit/Cips purchasing managers’ index (PMI).



The report’s main activity index slipped to 51.9 in December from 52.5 in November. It was above the 50-mark that separates growth from contraction but undershot forecasts of a 52.7 reading in a Reuters poll of economists.

The business survey painted a slightly brighter picture than official figures, which showed manufacturing was in recession last year.



Surveys from manufacturing in the eurozone showed business picked up in December offering some glimmers of hope for UK factories exporting to the single currency bloc.

