FTSE100 plummets 288 points

Black Monday: Global stocks plunge on fears over China

China sharesStock markets around the world plummeted today as nervous traders bailed out of shares on fears of a worsening situation in China.

London’s FTSE100 closed down 288.78 points or 4.7% at 5,898.87, its lowest for two and a half years and wiping £74 billion off the value of top shares. The FTSE250, a better measure of British companies, was down 4%.

Wall Street’s Dow Jones was nearly 6% lower in early trading, falling below 16,000 for the first time since February 2014, before rallying later in the session. The tech-heavy Nasdaq was down 8%, while markets in France and Germany slumped by 7% and 6% respectively.

Shares in Asia led the fall with the Shanghai Composite closing down 8.5%, its worst close since 2007.

Investors have become increasingly concerned about global trade since China’s central bank devalued the yuan two weeks ago, raising concerns that its economy was rapidly slowing down.

Currencies and commodities have also been hit because they rely heavily on strong demand from China. The Australian economy is likely to be hard hit because its minerals industries are dependent on demand from China.

Investors are now looking to the Chinese authorities to act quickly by cutting interest rates or at least partially reversing the currency devaluation. It promised to pour state pension funds into the market but this has not been enough to satisfy traders.

Dean Tenerelli, manager of T Rowe Price’s European Equity and Continental European Equity funds, said:  “China’s importance to the world should not be underestimated. China is a big trading partner with Europe, in particular Germany. We have been saying for the past year that our main worry in the world is China.

“China is clearly decelerating and the economic indicators lately have been uninspiring. Recent policy action, such as the currency depreciation, shows that the Chinese government is also concerned.

“However, this does not spell doom for Europe. We believe the earnings recovery in Europe is well underpinned. The recent Europe earnings season was the best we have had for five years and the European portion of earnings within European companies is highly encouraging. There is also a good GDP recovery underway, with countries like Ireland and Spain leading the way.

“Could China derail everything? It could result in a slower recovery, but we still believe Europe is headed in the right direction.”

Jorry Rask Nøddekær, manager of the Nordea 1 – Emerging Stars Equity Fund, said: “China’s recent currency devaluation has ‘turned on all alarms’ and significantly increased risk aversion. Many market participants and commentators see parallels to the Asian financial crisis of 1997, which to some degree was triggered by the large Chinese devaluation at the time.

“However, we do not believe we are at the forefront of a new Asian financial crisis. Our view is that China is in the middle of a long process to open up its economy and reform its financial system. As part of this process, China will need to have a truly exchangeable currency.

“The country has experienced a significant real appreciation of its currency for many years under the USD peg and has been suffering with the strong dollar. On most FX models, China does actually come out as having an overvalued currency.

“China is clearly slowing from a growth perspective. As we have been saying for some time, the old style China as we knew it is not coming back. This transition from the old economy to a new service and consumer-driven economy is definitely painful for some parts of the old economic engine.

“As for the market, if we look at today’s valuation levels, we see a number of high quality companies with very good medium to long-term growth outlooks trading very cheaply. We think many stock prices have dropped significantly below the medium to long-term growth and return fundamentals.”

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