The Shanghai stock market experienced its worst day since February 2007 after investors hopes that Beijing would loosen policy to stem recent selling proved unfounded.
The pan-European FTSEurofirst 300 fell 3.2 per cent to 1,381.77 points by midsession, taking roughly 270 billion euros off the value of shares.
The Shanghai Composite Index tumbled 8.9% to 3 197.31 at 1.14pm local time, erasing its gain for the year.
Safe-haven government bonds and the yen rallied on the widespread unrest in the financial markets, set in motion almost two weeks ago when China sharply devalued theyuan and stoked concerns about the state of its economy.
But analysts said the move would not be enough to stem the losses in Chinese shares at a time when global market sentiment was bleak. Losses appeared limited only by China’s emergency brake that limits individual shares from declining over 10 percent in a single day, and by the fact that a substantial number of stocks remain suspended from trading. It would also make American debt more attractive to investors, which means they could dump emerging market debt.
As commodity markets took a fresh battering, Brent and U.S. crude oil futures hit 6-1/2-year lows as concerns about a global supply glut added to worries over potentially weaker demand from the normally resource-hungry China.
In the latest move at the weekend, China said it will allow its huge state pension fund to invest up to 30 percent of its assets – which totaled 3.5 trillion yuan at the end of 2014, according to the official news agency Xinhua – in stocks.
In South Korea, another country extremely vulnerable to any slowdown in China, the benchmark Kospi Composite index was down 2.5 percent.
The ChiNext Index, which tracks China’s NASDAQ-style board of growth enterprises, fell 8.05 percent to close at 2,153.52 points. The Standard & Poor’s 500 index dropped 87 points, or 4.5 percent, to 1,882.
China’s first major economic indicator for August signalled a further deterioration in growth prospects as the preliminary Purchasing Managers’ Index from Caixin Media and Markit Economics trailed analyst estimates. Europe’s markets were bleeding heavily by late afternoon – down between 5% and 7% – after Wall Street was crushed at the open.
“However, a mix of disinflation and deflation forces, a tightening in global monetary conditions and deteriorating profits in emerging markets are much greater factors”.
The euro rose to $1.1451 from $1.1386, while it weakened to 138.77 yen from 138.97 yen in US trade. Oil slumped more than 4% to a new six-year low below $39 a barrel. The rout has seen bets on Fed tightening wound back amid speculation that the U.S. economy isn’t immune to global weakness and that cheaper energy and materials will smother still-nascent inflation.