Asia stocks fell to a three-month low on Thursday after China opted to keep guiding the yuan sharply lower, deepening concerns about the economy and the potential for competitive devaluations by other countries.
Shanghai shares tanked more than 7 percent and trading was halted as the fall triggered a circuit breaker, despite recent supportive measures announced by Chinese authorities.
MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 1.4 percent, hitting its lowest level since late September.
Japan’s Nikkei shed 1.5 percent. Australian shares lost 1.5 percent and South Korea’s KOSPI fell 0.7 percent.
Fears for the health of the Chinese economy, reflected recently in a sharply lower yuan, have become a key topic worrying investors so far in 2016.
Shares in Asia extended losses after the People’s Bank of China (PBOC) set the yuan midpoint rate at 6.5646 per dollar prior to the onshore market open, 0.50 percent weaker than the previous fix 6.5314. It was the biggest fall between daily fixings since August and the eighth day in row for the PBOC to set a lower guidance rate.
Offshore yuan fell to a fresh record low since trading started in 2010 before trimming a chunk of its losses on suspected intervention, but this did little to soothe sentiment.
Financial markets fear the yuan’s rapid depreciation may accelerate, which would mean China’s economy is even weaker than had been imagined, and could therefore spark another wave of competitive devaluations around Asia and in other key economies.
“The Chinese yuan is smack bang at the heart of concerns and much has been made of the comments in the China Securities Journal that the weakness in the CNY is not actually causing instability,” wrote Chris Weston, chief market strategist at IG in Melbourne.
“This is key, and traders feel this portrays more CNY weakness to come and therefore additional strain on the global economy, not to mention corporate China.”
Wall Street shares closed at three-month lows overnight amid the general risk aversion, amplified by a continuing decline in crude oil prices and geopolitical concerns following North Korea’s nuclear test on Wednesday.
U.S. Treasuries gained from a consequent flight to quality. The benchmark 10-year note yield sank 9 basis points to its lowest since mid-December.
The yen, another beneficiary in times of perceived global turmoil, also attracted bids. The dollar fell to a four-month low of 117.66 yen.
The greenback was also weighed down after the Federal Reserve’s December policy meeting minutes suggested further U.S. rate increases would be gradual because of concerns about persistently low inflation.
The euro was up 0.2 percent at $1.0804 with the dollar on the back foot.
The Australian dollar, often used as a proxy for China-related trades, fell to a two-month low of $0.7025.
In commodities, Brent crude fell to an 11-year low of $33.41 a barrel after data showed a surprisingly big build-up of U.S. gasoline stocks, adding to fears of a growing global glut.
The crude oil market has so far shrugged off rising geopolitical risks such as the tensions between Saudi Arabia and Iran, and North Korea’s nuclear test.
Brent crude futures fell to a fresh 11-year low on Thursday as a sliding yuan and an emergency halt in China’s stock trading left Asian markets in a turmoil, while a huge supply overhang and near-record output levels also continued to drag on oil prices.
China accelerated the devaluation of the yuan on Thursday, sending currencies across the region reeling and domestic stock markets tumbling, as investors feared the Asian giant was kicking off a virtual trade war against its competitors.
Trading on its stock markets was suspended for the rest of the day, the second time this week, and China’s securities regulator intervened heavily by issuing rules to restrict share sales by listed companies’ major shareholders.
Tracking the weakness across financial markets, the global benchmark Brent fell to $33.09 per barrel, the weakest since 2004 and below the previous 11-year low from Wednesday. Prices, however, edged back to $33.42 by 0440 GMT.
“With oil markets producing 1 million barrels a day in excess (of demand) and very little sign of any rational response from the supply side, it’s little wonder we’re seeing pressure again,” said Michael McCarthy, chief market strategist at CMC Markets in Sydney.
Global oil prices have crashed 70 percent since mid-2014 as near-record output from major producers such as the Organization of the Petroleum Exporting Countries (OPEC), Russia and North America has left storage tanks brimming with supplies.
Exacerbating the oil market woes is a weakening demand, especially in Asia, home to the world’s No.2 oil consumer, China, that is seeing the slowest economic growth in a generation.
“The Chinese economy actually contracted in December and that’s adding fire to fears of a more rapid slowdown in the world’s second biggest economy,” McCarthy said.
Financial markets fear the yuan’s rapid depreciation may accelerate, which would mean China’s economy is even weaker than had been imagined. Offshore yuan fell to a fresh record low on Thursday since trading started in 2010.
With the global economy looking shaky due to China’s slowdown, analysts said the outlook for oil remains for cheap prices for much of this year.
“We think low $30’s (per barrel) is a floor, but once positioning gets so biased anything can happen,” said Virendra Chauhan, analyst at Energy Aspects in Singapore.
In the United States, West Texas Intermediate (WTI) futures set fresh 2009 lows of $32.77 per barrel, with prices crawling back to $33.17 by 0440 GMT.
Analysts said a buildup in U.S. stockpiles was the main reason for the drop in WTI prices.
“The U.S. inventory numbers showed a 16 million increase in distillates and other products, so it’s clear they’re still producing at rates that are unsustainable,” McCarthy said.
The huge storage overhang means that even if U.S. production falls this year as drillers succumb to low prices, it will take many months to work down excess supplies.