Here’s the Problem in China That’s Slamming US Stocks
Business + Economy

Here’s the Problem in China That’s Slamming US Stocks

Aly Song

It was a very unhappy New Year for equity bulls as a slew of factors helped to curb sentiment Monday, with investors seeking "safe haven" assets.

On investors' watch list were heightened geopolitical tensions between Iran and Saudi Arabia over the weekend and comments from Federal Reserve members at the American Economic Association meeting. But what was really rattling cages was a renewed sell-off within China.

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China tanks 7%

Feeble manufacturing surveys revived concerns over the slowdown in the world's second largest economy. Fresh manufacturing PMIs on Monday showed a fall to 48.2 in December from 48.6 in the previous month, contracting for a 10th month and coming in below a Reuters poll forecast for 49.

Liquidity also came back to global markets after the holiday period alongside hints from Beijing that it will likely keep the yuan currency weak against the U.S. dollar in 2016. Reuters also reported that traders were dumping stocks ahead of the expiration of a share sales ban on listed companies' major shareholders.

"Concern over the health of the Chinese economy accompanied by spiking tensions in the Middle East have combined to ensure a particularly weak first trading session of the year for Asian equities which, in turn, is resulting in firm demand for safe haven assets," analysts at Rabobank said in a morning note on Monday. 

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The distinctly risk-off mood was highlighted as the Shenzhen composite had its worst day since early 2007, closing down 8.2 percent. The Shanghai composite ended down 6.86 percent and trading on both exchanges was temporarily halted as the authorities implemented a "circuit breaker" for the first time.

In Europe, the pan-European STOXX 600 was down over 2.4 percent in morning trade with Germany's DAX slumping over 3 percent. Mining stocks were down by almost 4 percent. The EURO STOXX 50 volatility index — a rough gauge of fear in European benchmarks — jumped to a high of 27 points on Monday morning, up from 22 points. U.S. futures were also pointing to triple-digit losses for the Dow Jones industrial average on Monday.

Fixed income assets were the beneficiary amid the equity plunge. Yields on the 10-year U.S. Treasury fell to 2.2303 percent from a previous close of 2.275 percent. The yield on the 10-year Bund slipped to 0.5868 percent from 2015's closing level of 0.635 percent.

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Saudi Arabia severs diplomatic ties

Meanwhile, rising tensions between Iran and Saudi Arabia provided little risk premium to oil prices on Monday. Prices had moved higher after a breakdown in diplomatic ties that could still lead to supply restrictions in the Middle East.

Saudi Arabia severed diplomatic ties with Iran over the weekend after Iranian protesters stormed Saudi Arabia's embassy in Tehran following Saudi Arabia's execution of Shiite cleric Nimr al-Nimr on Saturday.

Mester sounds hawkish

In the U.S., hawkish comments from some Federal Reserve heads are on the minds of investors as the pace of interest rate hikes remain in focus. Loretta Mester, president of the Cleveland Fed, told Reuters on Sunday that she does not need to see clear evidence of inflation to back more policy tightening after an initial rate hike in mid-December.

"Traders will have to sit tight and fasten their belts as the first trading day of this year is not starting off which they would have imagined. It is ugly out there today, and you have to be careful and the fact is that the recent hawkish tone by the Fed over in the U.S. is making investors more nervous," Naeem Aslam, chief market analyst at AvaTrade, said in a note on Monday.

This article originally appeared on CNBC. Read more from CNBC:

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