Global stocks in ‘panic mode’ as Chinese factory slump drags on markets

The FTSE 100 has hit its lowest level this year after further signs of a weakening Chinese economy spooked investors.

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Britain’s leading share index fell to 6,286 points on Friday morning immediately after opening, which was a decline of 1.26%. It subsequently clawed back some of those gains by mid-morning to 6,333 points, down 0.8%.

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The FTSE drop mirrored stock markets across Asia-Pacific after they went into “panic mode” when further signs of a weakening Chinese economy compounded overnight losses on Wall Street and European bourses.

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China’s factory sector shrank at its fastest pace in more than six years in August as domestic and export demand dwindled, a private survey showed, adding to worries that the world’s second-largest economy may be slowing sharply and sending financial markets into a tailspin.

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China’s surprise devaluation of the yuan and heavy selling in its stock markets in recent weeks have sparked fears that it could be at risk of a hard landing, which would hammer world growth.

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Markets in countries whose economic fortunes are closely linked to China’s growth tumbled. Japan’s Nikkei average dropped almost 3% to six-week lows on Friday, while the Kopsi index in South Korea fell 1.92%.

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The Australian dollar was also hammered, falling 0.45% and went as low as US72.85c. The Aussie, which is seen as a proxy for the Chinese economy, has fallen about 1% in the past week.The Australian dollar was also hammered, falling 0.45% and went as low as US72.85c. The Aussie, which is seen as a proxy for the Chinese economy, has fallen about 1% in the past week.

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The Hang Seng stock index in Hong Kong was down 1.92% while the Shanghai Composite index was 4.2% lower

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Shares in Australia are having their worst month since the global financial crisis hit in October 2008. On Friday afternoon the benchmark ASX200 was down 1.4% at 5,214 points and is down 8.5% so far in August, according to broker Commsec.

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Commodities also suffered. US crude hit fresh six-and-a-half year lows near $40 a barrel as it headed for its eighth straight weekly decline, the longest weekly losing streak since 1986. Brent crude for October delivery was down 29c at $46.33.

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“Global markets are in panic mode as the full scale of China’s slowdown becomes clearer,” said Angus Nicholson at IG Markets in Sydney.

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The long-awaited interest rate rise by the US federal reserve, pencilled in for as early as September by many analysts, was now looking much less likely, Nicholson added.

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“The potential for further devaluations in the Chinese yuan not only make a US rate hike in September unlikely, but increasingly even put a December rate hike at risk.”

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Japan’s economics minister, Akira Amari, said on Friday that he expected China’s government to take steps to prevent its economic slowdown from becoming a global problem.

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The preliminary Caixin/Markit China manufacturing purchasing managers’ index (PMI) stood at 47.1 in August, well below economists’ expectations of 47.7 and down from July’s final 47.8.

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The reading was the worst since March 2009, the depths of the global financial crisis, and the sixth straight one below the 50-point level, which separates growth in activity from contraction on a monthly basis.

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The flash PMI, the earliest economic measure to be released about China each month, is closely followed by global investors for clues on the health of the economy.

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“The poor number confirms what higher frequency data has been suggesting, that more weakness in the economy is likely,” said Chester Liaw, an economist at Forecast in Singapore.

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He added: “The authorities claimed that there will be a rebound in demand in the second half but it appears that the opposite is happening. With first half GDP scraping the bottom of the barrel at 7%, the authorities will have a fight on their hands to ensure that the second half of the year comes in at even the same level.”

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A detailed breakdown of the activity survey showed conditions were deteriorating on almost every level, with factory output sinking to a near four-year low, domestic and export orders declining at a faster rate than in July and companies laid off more workers.

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US Federal Reserve policymakers discussed China, Greece’s debt crisis and the weak state of the global economy at their last meeting in July, according to minutes of the meeting released this week.

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US stock futures fell sharply after the PMI report and most Asian stock markets and the Australian dollar extended early losses. Overnight on Wall Street, the S&P 500 sank to a more than six-month low on concerns about how China’s slowdown would impact US firms’ earnings and global growth.

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Tony Cross, an analyst with Trustnet Direct in London, said the FTSE could be heading for its worst week this year. “As it stands the FTSE 100 is on course to post its biggest weekly decline of the year so far and there’s not a great deal on the agenda that would appear to have the ability to salvage the situation before the weekend break,” he said.

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Connor Campbell, an analyst at Financials, also predicted fresh lows. Oil and mining stocks were “drowning in losses” from the beginning of the day, he said. – Guardian

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