Sell-off in Asian markets sends STI to its lowest since mid-2012

Sell-off in Asian markets sends STI to its lowest since mid-2012

Singapore - Waves of selling engulfed Asian stock markets on Thursday following a 7-per-cent collapse in China stocks, which triggered the circuit breakers for the second time in four days before trading was halted for the rest of the day.

By late Thursday, however, Beijing announced that it would from Friday suspend the circuit-breaker mechanism implemented on Jan 1.

Deng Ke, the spokesman for the China Securities Regulatory Commission (CSRC), said in a statement: "Currently, negative effects of the mechanism are larger than positive effects. Thus, the CSRC has decided to suspend the circuit-breaker mechanism to maintain market stability."

With the collapse in China stocks on Thursday, the Straits Times Index plunged 74.36 points or 2.7 per cent to 2,729.91, its lowest since June 2012. Turnover, which has regularly averaged less than S$1 billion daily, swelled to 1.3 billion units worth S$1.6 billion, the highest since S$1.7 billion was traded last Nov 30.

Hong Kong stocks, often proxy victims of selling pressure when trading in China is suspended, also took a beating, with the Hang Seng Index dropping 647.47 points or 3 per cent to 20,333. The Nikkei recorded a 423.98-point or 2.3 per cent loss at 17,767.34.

In the futures market, the March contract on the Dow Jones Industrial Average plunged 290 points in Asian trading; later on Thursday, when Wall Street opened, the Dow Jones was down 250.25 points or 1.48 per cent at 16,656.26. The S&P 500 was down 28.88 points or 1.45 per cent, at 1,961.38 and the Nasdaq Composite index, down 84.10 points or 1.74 per cent, at 4,751.66.

On Monday, circuit breakers in the Shanghai stock exchange had been triggered when the Composite Index dropped 7 per cent during the day; on Thursday, this loss was run up within 30 minutes of the market opening, a time span that included a 15-minute "cooling-off period" following a 5-per-cent slide.

All observers pointed to turmoil in China as the main cause of the selling. On Wednesday, the People's Bank of China (PBOC) announced a yuan fixing that was 0.51 per cent lower than the previous day, sending regional stocks and currencies diving.

Associate Professor Lee Boon Keng of the Nanyang Business School said: "Asian currencies have come under renewed downward pressure at the start of the new year. The Chinese yuan being set lower by the PBOC over the past week has stoked the fear of a currency war.

"The Singapore dollar, the tool used by the Monetary Authority of Singapore to implement its monetary policy, is especially sensitive to expectations of where global currencies are going. At the moment, it appears that they are all heading south against the US dollar and it would only be appropriate for the Singapore dollar to do the same - albeit not by the same amount - just to ensure that the economy remains relatively competitive. After all, inflation is everywhere in sight in the world, except perhaps in the United States.

"And here is where a potential double-whammy may be coming from - higher US dollar interest rates. So, with the Chinese trying all means to prevent a hard landing and the Federal Reserve perhaps rather behind the curve in raising interest rates, Asian currencies could be entering a perfect storm in 2016."

Since China first devalued its currency last August, the yuan has plunged almost 6 per cent against the US dollar; the Singapore dollar has fallen 5 per cent.

Rabobank said the turmoil in China casts doubts on the US Federal Reserve's plan to raise its interest rates four times this year - doubts which were underscored by the minutes of the December Federal Open Markets Committee (FOMC) meeting released on Wednesday.

The bank said: "While the minutes confirmed that the FOMC was reasonably confident in its expectation that inflation would rise over the medium term, for some members, the risks attending their inflation forecasts remained considerable."

The Chinese authorities have repeatedly intervened since the middle of 2015 to shore up their stock market. On Wednesday, the CSRC extended its ban on the sale of holdings by large shareholders - those holding more than 15 per cent of a listed company's equity. The ban had been due to expire on Friday.

Amid this bearishness, however, HSBC Global Research's head of HK/China Equity research Steven Sun wrote in a note that a poor start to the year did not equate to a poor end: "State intervention provides stability and will allow capital market reforms to take effect. We expect circuit-breaker rules to be refined and the spike in volatility to be temporary. Leverage has come down sharply from last summer, while liquidity and sentiment have largely normalised...

"Initiatives such as IPO registration reform, Shenzhen-HK Stock Connect and the Strategic Emerging Board in Shanghai will help rebuild confidence in the A-share market in 2016."

This article was first published on January 8, 2016.
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