Market commentary: Equities, commodities continue to plunge on China weakness

The European stock rout is getting worse as equities tumbled for a fourth day and Germany’s benchmark gauge headed for a bear market. The DAX opened over 3 percent down today, but recovered slightly to around 2 percent below Friday’s closing level. The index is now 21 percent below its peak in March 2015.

Miners plunged 6.1 percent for the biggest slump among industry groups as commodities were set for their lowest levels since 1999. Brent crude fell below $45 a barrel for the first time in more than six years amid signs a global glut will persist as Iran pledged to boost production and U.S. drilling activity sustained an increase. Iran’s oil minister said the country will expand output “at any cost” while in the U.S., the number of active rigs rose for the seventh time in eight weeks. Oil prices retreated for a fourth day, extending declines from the lowest close since March 2009.

The rout in the equity market which began with the devaluation of China’s currency, raising concern over a global economic slowdown, has sent the Stoxx 600 benchmark into a correction, closing 13 percent lower than the record it reached in April. Thirteen out of 18 western- European markets have fallen 10 percent or more from their high this year.

The Stoxx 600 traded at a seven-month low of 15.4 times estimated earnings on Friday, compared with 17.4 times in April, which was reached after the European Central Bank began quantitative easing to support the economy.

The European sell-off followed China’s stocks plunge, the most since 2007, as government support measures failed to tame investor concern that a slowdown in the world’s second-largest economy is deepening.

The Shanghai Composite Index tumbled 8.5 percent to 3,209.91 at the close to erase its gains for the year. Worsening economic data and signs of capital outflows are undermining unprecedented government attempts to shore up the country’s $6 trillion stock market. While China said over the weekend it will allow pension funds to buy shares for the first time, a speculated cut in bank reserve ratios failed to materialise.

The euro climbed to the strongest level since February against the dollar, reaching $1.15, while the Yen rose to a three-month high. The euro and yen are rallying as traders have drastically cut their expectations that the Federal Reserve will raise interest rates next month.

South Africa’s rand was the hardest hit of 16 major peers today versus the dollar, and Australia’s Aussie reached a six-year low. Investors are favouring both as slumping commodity and share prices propel the selloff in emerging-market currencies that started after China’s shock devaluation on Aug. 11.

Moody’s today announced that Prime Minister Alexis Tsipras’s resignation is “credit positive for the sovereign because it offers the possibility of a new more cohesive government, which would improve prospects for implementing Greece’s third bailout package and reducing liquidity and funding risks,” Tsipras’s resignation opens up the opportunity for a new, possibly a more moderate Syriza party governing alone or in a coalition with other pro-European parties.

This article was issued by Simon Psaila, Treasury Officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.