Global stocks extend rout with commodities as Soros sees crisis

[WELLINGTON] European and Asian shares dropped with US stock futures as signs China is seeking a weaker yuan heighten concerns about a slowdown in the world's second-largest economy. Crude oil sank with copper as billionaire George Soros warned of a crisis.

The Stoxx Europe 600 Index and the MSCI Asia-Pacific Index of shares sank to three-month lows. The CSI 300 Index of companies listed in Shanghai and Shenzhen tumbled 7 per cent, the maximum daily slide allowed before trading is halted, after China weakened the reference rate for its currency by the most since August.

The offshore yuan fell to a five-year low, before rebounding on suspected intervention, and US crude was headed for its worst close in two decades. The yen rose to its strongest level since August, while U.S. Treasuries and gold rallied as investors favored safe-haven assets.

"China has a major adjustment problem," Mr Soros said Thursday at an economic forum in Colombo, Sri Lanka.

"I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008."

Chinese policy makers' growing tolerance for a weaker yuan is being seen as a sign they are struggling to revive an economy that's the world's biggest user of energy, metals and grains. Those concerns helped wipe US$2.5 trillion off the value of global equities in the first six days of this year as North Korea conducted a nuclear weapons test and relations soured between Saudi Arabia and Iran.

STOCKS

The Stoxx Europe 600 Index dropped 1.9 per cent as of 8.04 am in London. Futures on the Standard & Poor's 500 Index lost 1.4 per cent, after the US benchmark slipped Wednesday to its lowest level in three months.

The MSCI Asia Pacific Index slipped 2.1 per cent. A gauge of Chinese shares listed in Hong Kong slumped 4.2 per cent and the Hang Seng Index dropped 3.1 per cent. Benchmark stock indexes in Australia, Japan, Singapore and Thailand all lost more than 2 per cent.

"The Chinese yuan is smack bang at the heart of concerns," Chris Weston, chief market strategist in Melbourne at IG Ltd.

"For risk assets to stabilise and sentiment to turn around, we are going to need a stable or even positive move in the Chinese currency. It's clear that the market is becoming increasingly concerned by the global inflation outlook."

The Shanghai Composite Index tumbled 7.3 per cent before trading was suspended. After the halt, the securities regulator announced rules to limit selling by major shareholders when a ban expires this week.

The watchdog also held an unscheduled meeting on the China's tumbling stock market without coming to a decision on policy action, according to a person familiar with the discussions.

CURRENCIES

The offshore yuan swung from a 0.3 per cent gain to a 0.7 per cent loss and back in the space of about 30 minutes in early trading in Hong Kong's freely traded market. It was subsequently 0.4 per cent higher versus the greenback, while the onshore rate weakened 0.6 per cent.

The People's Bank of China cut the yuan's reference rate by 0.5 per cent, the most since the week of an Aug 11 devaluation that roiled global markets.

"We saw aggressive intervention in the offshore yuan market," said Zhou Hao, an economist at Commerzbank AG in Singapore.

"We don't really understand the rationale behind the market movements in the past few days. Obviously, these movements have reminded us of the market rout last year."

The central bank is considering new measures to prevent high exchange-rate volatility in the short term, according to people familiar with the matter. China updates its foreign- currency reserve levels Thursday, giving traders an insight into how much its management of the yuan cost in December.

The holdings fell by more than $400 billion in the first 11 months of 2015 as the PBOC bought yuan to support the exchange rate.

The yen, which has been the best-performing major currency so far this year amid the demand for safe-haven assets, rose as much as 0.7 per cent to its strongest level since August versus the dollar.

COMMODITIES

The Bloomberg Commodity Index fell 1 per cent, headed for its lowest close since 1999. Copper dropped 2.4 per cent in London and nickel sank 3 per cent.

West Texas Intermediate crude slid 4.2 per cent to US$32.53 a barrel, poised for the lowest settlement since February 2004. US gasoline inventories surged the most in 22 years and crude supplies at Cushing, Oklahoma - the American hub - climbed to an all-time high, government data showed Wednesday.

Concern about a global oversupply saw crude cap its biggest ever two- year tumble in 2015, with OPEC abandoning limits on production and U.S. oil stockpiles remaining about 100 million barrels above their five-year average.

Gold rose as much as 0.8 per cent to a two-month high of US$1,102.85 an ounce.

"Gold is probably the only one beneficiary among all the commodity markets from all the turmoil in the geopolitical scene," Bob Takai, chief executive officer and president of Sumitomo Corp Global Research, said by phone from Tokyo.

BONDS

Yields on 10-year Treasury notes fell as much as three basis points to a three-week low of 2.14 per cent. Japanese government bond futures advanced to a record high after 30-year notes were auctioned at a higher price than dealers forecast.

South Korea's 10-year yield fell to a record low as the weakening yuan dimmed the outlook for exports to China and North Korea's fourth nuclear test, conducted on Wednesday, spurred demand for safer assets.

BLOOMBERG